Economy of North Korea
Encyclopedia
The economy
of North Korea
is an industrialized and centrally planned economy
.
North Korea's economy remains one of the world's last centrally planned systems. The role of market allocation
is sharply limited – mainly in the rural sector where some peasants sell produce from small private plots. There are almost no legal small business
es, but illegal small business are very common. Although there have been scattered and limited attempts at decentralization
, as of mid-1993, Pyongyang
's basic adherence to a rigid centrally planned economy continues, as does its reliance on fundamentally non-monetary incentives. The collapse
of communist governments around the world in 1991, particularly North Korea's principal source of support, the Soviet Union, have forced North Korean economy to realign its foreign economic relations. Economic exchanges with South Korea have even begun in earnest ways at times, see Kaesong Industrial Region
.
This trend was not reversed until after the end of World War II
, when more than 2 million Koreans moved from North to South following the division of Korea
into Soviet
and American military
zones of administration. This southward exodus continued after the establishment of the Democratic People's Republic of Korea (North Korea) in 1948 and during the 1950–53 Korean War
. The North Korean population
as of October 2008 was given as 24 million, compared with 48–50 million
in South Korea.
The post-World War II division of the Korean Peninsula
resulted in imbalances of natural and human resources, with disadvantages for both the North and the South. By most economic measures, after partition the North was better off in terms of industry and natural resources. The South, however, had two-thirds of the work force. In 1945, about 65% of Korean heavy industry was in the North but only 31% of light industry, 37% of agriculture, and 18% of the peninsula's total commerce.
North and South both suffered from the massive destruction caused during the Korean War. In the years immediately after the war, North Korea mobilized its labour force and natural resources in an effort to achieve rapid economic development. Large amounts of aid from other communist countries, notably the Soviet Union and the People's Republic of China
, helped the regime achieve a high growth rate in the immediate postwar period.
on all of its loans except those from Japan. By the end of 1986, hard-currency
debt had reached more than USD 1 billion
. It also owed nearly USD 2 billion to communist creditors, principally the Soviet Union. The Japanese also declared North Korea in default. By 2000, taking into account penalties and accrued interest, North Korea's debt was estimated at USD 10-12 billion.
Largely because of these debt problems but also because of a prolonged drought and mismanagement, North Korea's industrial growth slowed, and per capita GNP fell below that of the South. By the end of 1979 per capita GNP in North Korea was about one-third of that in the South. The causes for this relatively poor performance are complex, but a major factor is the disproportionately large percentage of GNP (possibly as much as 25%) that North Korea devotes to the military.
There have been some minor efforts toward relaxing central control of the economy in the 1980s that involve industrial enterprises. Encouraged by Kim Jong Il's call to strengthen the implementation of the independent accounting system of enterprises in March 1984, interest in enterprise management and the independent accounting system has increased, as evidenced by increasing coverage of the topic in various North Korean journals. Under the system, factory managers still are assigned output targets but are given more discretion in making decisions about labour, equipment, materials, and funds.
In addition to fixed capital, each enterprise is allocated a minimum of working capital
from the state through the Central Bank
and is required to meet various operating expenses with the proceeds from sales of its output. Up to 50% of the "profit" is taxed, the remaining half being kept by the enterprise for purchase of equipment, introduction of new technology, welfare benefits, and bonuses. As such, the system provides some built-in incentives and some degree of micro-level autonomy, unlike the budget allocation system, under which any surplus is turned over to the government in its entirety.
Another innovation, the August Third People's Consumer Goods Production Movement, is centred on consumer goods production. This measure was so named after Kim Jong Il made an inspection tour of an exhibition of light industrial products held in Pyongyang on August 3, 1984. The movement charges workers to use locally available resources and production facilities to produce needed consumer goods. On the surface, the movement does not appear to differ much from the local industry programs in existence since the 1960s, although some degree of local autonomy is allowed. However, a major departure places output, pricing, and purchases outside central planning. In addition, direct sales stores have been established to distribute goods produced under the movement directly to consumers. The movement is characterized as a third sector in the production of consumer goods, alongside centrally controlled light industry and locally controlled traditional light industry. Moreover, there were some reports in the mid-1980s of increasing encouragement of small-scale private handicrafts and farm markets. As of 1992, however, no move was reported to expand the size of private garden plots.
All these measures appear to be minor stop-gap measures to alleviate severe shortages of consumer goods by infusing some degree of incentives. In mid-1993 no significant moves signalling a fundamental deviation from the existing system had occurred. The reluctance to initiate reform appears to be largely political. It is, perhaps, the linkage between economic reform and political liberalization that worries the leadership. This concern is based on the belief that economic reform will produce new interests that will demand political expression, and that demands for the institutionalization of such pluralism eventually will lead to political liberalization. There clearly exists a catch-22
situation for Kim Il Sung and, particularly, for Kim Jong Il. In order to legitimize his power base, the younger Kim needs an economic base. However, his economic reforms challenge his position as the advancer of Juche
and may eventually undo the regime.
Beginning in the mid-1980s, and particularly around the end of the decade, North Korea began slowly to modify its rigid self-reliant policy. The changes, popularly identified as the open-door policy, included an increasing emphasis on foreign trade, a readiness to accept direct foreign investment by enacting a joint venture law, the decision to open the country to international tourism, and economic cooperation with South Korea.
The main targets of the Third Seven-Year Plan of 1987–93 were to achieve the "Ten Long-Range Major Goals of the 1980s for the Construction of the Socialist Economy". These goals, conceived in 1980, were to be fulfilled by the end of the decade. The fact that these targets were rolled over to the end of the Third Seven-Year Plan is another indication of the disappointing economic performance during the Second Seven-Year Plan. The three policy goals of self-reliance, modernization, and scientification were repeated. Economic growth was set at 7.9% annually, lower than the previous plan. Although achieving the ten major goals of the 1980s is the main thrust of the Third Seven-Year Plan, some substantial changes have been made in specific quantitative targets. For example, the target for the annual output of steel has been reduced by a third, from 15 million tons to 10 million tons. The output targets of cement and non-ferrous metals—two major export items—have been increased significantly. The June 1989 introduction of the Three-Year Plan for Light Industry as part of the Third Seven-Year Plan is intended to boost the standard of living
by addressing consumer needs.
The Third Seven-Year Plan gave a great deal of attention to developing foreign trade and joint ventures, the first time a plan has addressed these issues. By the end of 1991, however, two years before the termination of the plan, no quantitative plan targets had been made public, an indication that the plan has not fared well. The diversion of resources to build highways, theatres, hotels, airports, and other facilities in order to host the Thirteenth World Festival of Youth and Students in July 1989, must have had a negative impact on industrial and agricultural development, although the expansion and improvement of social infrastructure have resulted in some long-term economic benefits.
North Korea announced in December 1993 a 3-year transitional economic policy placing primary emphasis on agriculture, light industry, and foreign trade. However, lack of fertilizer, natural disasters, and poor storage and transportation practices have left the country more than a million tons per year short of grain self-sufficiency. Moreover, lack of foreign exchange to purchase spare parts and oil for electricity generation
left many factories idle.
The shortage of foreign exchange because of a chronic trade deficit, a large foreign debt, and dwindling foreign aid has constrained economic development. In addition, North Korea has been diverting scarce resources from developmental projects to defence; it spent more than 20% of GNP on defence toward the end of the 1980s, a proportion among the highest in the world. These negative factors, compounded by the declining efficiency of the central planning system and the failure to modernize the economy, have slowed the pace of growth since the 1960s. The demise of the communist regimes in the Soviet Union and East European countries—North Korea's traditional trade partners and benefactors—has compounded the economic difficulties in the early 1990s.
Although general economic policy objectives are decided by the Central People's Committee (CPC), it is the task of the State Planning Committee to translate the broad goals into specific annual and long-term development plans and quantitative targets for the economy as a whole, as well as for each industrial sector and enterprise. Under the basic tenets of the 1964 reforms, the planning process is guided by the principles of "unified planning" and of "detailed planning" .
Under "unified planning," regional committees are established in each province, city, and county to systematically coordinate planning work. These committees do not belong to any regional organization and are directly supervised by the State Planning Committee. As a result of a reorganization in 1969, they are separated into provincial planning committees, city/county committees, and enterprise committees (for large-scale enterprises).
The various planning committees, under the auspices of the State Planning Committee, coordinate their planning work with the existing planning offices of the various economy-related government organizations in each of the corresponding regional and local areas. The system attempts to enable the regional planning staffs to better coordinate with economic establishments in their areas, which are directly responsible to them with regard to planning, as well as to communicate directly with staff at the CPC. "Detailed planning" seeks to construct plans with precise accuracy and scientific methods based on concrete assessment of the available resources, labour, funds, plant capacities, and all other necessary information.
There are four stages in drafting the final national economic plan. The first stage is collecting and compiling preliminary statistical data. These figures, which are used as the basic planning data on the productive capacities of various economic sectors, originally are prepared by lower level economic units and aggregated on a national level by respective departments and committees. Simultaneously, the regional, local, and enterprise planning committees prepare their own data and forward them to the CPC. Through this two-channel system of simultaneous but separate and independent preparation of statistical data by economic units and planning committees, the government seeks to ensure an accurate, objective, and realistic data base unfettered by local and bureaucratic bias. The second stage is preparing the control figures by the CPC based on the preliminary data in accordance with the basic plan goals presented by the Central People's Committee. In the third stage, a draft plan is prepared.
The draft plan, prepared by the CPC, is the result of coordinating all draft figures submitted by the lower level economic units, which, in turn, base their drafts on the control figures handed down from the committee. In the fourth stage, the CPC submits a unified national draft plan to the Central People's Committee and the State Administration Council for confirmation. After approval by the Supreme People's Assembly, the draft becomes final and is distributed to all economic units as well as to regional and local planning committees. The plan then becomes legal and compulsory. Frequent directives from the central government contain changes in the plan targets or incentives for meeting the plan objectives.
Although the central government is most clearly involved in the formulation and evaluation of the yearly and long-term plans, it also reviews summaries of quarterly or monthly progress. Individual enterprises divide the production period into daily, weekly, ten-day, monthly, quarterly, and annual periods. In general, the monthly plan is the basic factory planning period.
The success of an economic plan depends on the quality and detail of information received, the establishment of realistic targets, coordination among different sectors, and correct implementation. High initial growth during the Three-Year Plan and, to a lesser extent, during the Five-Year Plan contributed to a false sense of confidence among the planners. Statistical overreporting—an inherent tendency in an economy where rewards lie in fulfilling the quantitative targets, particularly when the plan target year approaches—leads to overestimation of economic potential, poor product quality, and eventually to plan errors. Inefficient utilization of plants, equipment, and raw materials also add to planning errors. Lack of coordination in planning and production competition among sectors and regions cause imbalances and disrupt input-output relationships. The planning reforms in 1964 were supposed to solve these problems, but the need for correct and detailed planning and strict implementation of plans was so great that their importance was emphasized in the report unveiling the Second Seven-Year Plan, indicating that planning problems persisted in the 1980s.
The leadership claimed that farm workers were unhappy and produced low output because low-ranking functionaries of the Workers' Party of Korea
, who expounded abstract Marxist
theories and slogans, were using incorrect tactics that failed to motivate. To correct this, the leadership recommended that the workers receive specific guidance in solving production problems and be promised readily available material incentives. The Ch'ŏngsan-ni Method called for high-ranking party officials, party cadres, and administrative officials to emulate Kim Il Sung by making field inspections. The system also provided opportunities for farmers to present their grievances and ideas to leading cadres and managers.
Perhaps more important than involving administrative personnel in on-site inspections was the increased use of material incentives, such as paid vacations, special bonuses, honorific titles, and monetary rewards. In fact, the Ch'ŏngsan-ni Method appeared to accommodate almost any expedient to spur production. The method, however, subsequently was undercut by heavy-handed efforts to increase farm production and amalgamate farms into ever-larger units. Actual improvement in the agricultural sector began with the adoption of the subteam contract system as a means of increasing peasant productivity by adjusting individual incentives to those of the immediate, small working group. Thus the increasing scale of collective farms was somewhat offset by the reduction in the size of the working unit. "On-the-spot guidance" by high government functionaries, however, continues in the early 1990s, as exemplified by Kim Il Sung's visits to such places as the Wangjaesan Cooperative Farm in Onsŏng County
and the Kyŏngsŏn Branch Experimental Farm of the Academy of Agricultural Sciences between August 20 and 30, 1991.
developed in three distinct stages. The first stage was a period of enterprise autonomy that lasted until December 1946. The second stage was a transitional system based on local autonomy, with each enterprise managed by the enterprise management committee under the direction of the local people's committee. This system was replaced by the "one-man management system" , with management patterned along Soviet lines as large enterprises were nationalized and came under central control. The third stage, the Taean Work System , was introduced in December 1961 as an application and refinement of agricultural management techniques to industry. The Taean industrial management system grew out of the Ch'ŏngsan-ni Method.
The highest managerial authority under the Taean system is the party committee. Each committee consists of approximately 25 to 35 members elected from the ranks of managers, workers, engineers, and the leadership of "working people's organizations" at the factory. A smaller "executive committee", about one-quarter the size of the regular committee, has practical responsibility for day-to-day plant operations and major factory decisions. The most important staff members, including the party committee secretary, factory manager, and chief engineer, make up its membership. The system focuses on co-operation among workers, technicians, and party functionaries at the factory level.
Each factory has two major lines of administration, one headed by the manager, the other by the party committee secretary. A chief engineer and his or her assistants direct a general staff in charge of all aspects of production, planning, and technical guidance. Depending on the size of the factory, varying numbers of deputies oversee factory logistics, marketing, and workers' services. The supply of materials includes securing, storing, and distributing all materials for factory use, as well as storing finished products and shipping them from the factory.
Deputies are in charge of assigning workers to their units and handling factory accounts and payroll. Providing workers' services requires directing any farming done on factory lands, stocking factory retail shops, and taking care of all staff amenities. Deputies in charge of workers' services are encouraged to meet as many of the factory's needs as possible using nearby agricultural cooperatives and local industries.
The secretary of the party committee organizes all political activities in each of the factory party cells and attempts to ensure loyalty to the party's production targets and management goals. According to official claims, all management decisions are arrived at by consensus among the members of the party committee. Given the overwhelming importance of the party in the country's affairs, it seems likely that the party secretary has the last say in any major factory disputes.
The Taean system heralded a more rational approach to industrial management than that practised previously. Although party functionaries and workers became more important to management under the new system, engineers and technical staff also received more responsibility in areas where their expertise could contribute the most. The system recognizes the importance of material as well as "politico-moral" incentives for managing the factory workers. The "internal accounting system", a spin-off of the "independent accounting system", grants bonuses to work teams and workshops that use raw materials and equipment most efficiently. These financial rewards come out of enterprise profits.
A measure of the success of the Taean Work System is its longevity and its continued endorsement by the leadership. In his 1991 New Year's address marking the thirtieth anniversary of the creation of the system, Kim Il Sung said that the
. Introduced in 1958, and fashioned after China's Great Leap Forward
(1958–60), the Ch'ŏllima Movement organized the labour force into work teams and brigades to compete at increasing production. The campaign was aimed not only at industrial and agricultural workers but also at organizations in education, science, sanitation and health, and culture. In addition to work teams, units eligible for Ch'ŏllima citations included entire factories, factory workshops, and such self-contained units as a ship or a railroad station. The "socialist competition
" among the industrial sectors, enterprises, farms, and work teams under the Ch'ŏllima Movement frantically sought to complete the First Five-Year Plan (1957–60), but instead created chaotic disruptions in the economy. The disruptions made it necessary to set aside 1959 as a "buffer year" to restore balance in the economy.
Although the Ch'ŏllima Movement was replaced in the early 1960s by the Ch'ŏngsan-ni Method and the Taean Work System, the regime's reliance on some form of mass campaign continued into the early 1990s. Campaigns conducted after the Ch'ŏllima Movement have been narrower in scope and have concentrated on specific time frames for a particular industry or economic sector. Often, the mass production movement takes the form of a "speed battle"—the "100-day speed battle" being most common. The fact that the leadership has to resort to these campaigns points to the weakness or improper functioning of the regular day-to-day management system, as well as to a lack of incentives for workers to achieve the desired economic results. The leadership frequently resorts to speed battles toward the end of a certain period (such as a month, a year, or a particular economic plan) to reach production targets. The "Speed of the 1990s" is designed to carry out the economic goals of the decade.
facilities, television sets, and water.
In order to provide a certain degree of local autonomy as well as to lessen the financial burden of the central government, a "local budget system" was introduced in 1973. Under this system, provincial authorities are responsible for the operating costs of institutions and enterprises not under direct central government control, such as schools, hospitals, shops, and local consumer goods production. In return, they are expected to organize as many profitable ventures as possible and to turn over profits to the central government.
Around November of every year, the state budget for the following calendar year is drafted, subject to revision around March. Typically, total revenue exceeds expenditure by a small margin, with the surplus carried over to the following year. The largest share of state expenditures goes to the "people's economy," which averaged 67.3% of total expenditures between 1987 and 1990, followed in magnitude by "socio-cultural," "defense," and "administration."
Defense spending, as a share of total expenditures, has increased significantly since the 1960s: from 3.7% in 1959 to 19% in 1960, and, after averaging 19.8% between 1961 and 1966, to 30.4% in 1967. After remaining around 30% until 1971, the defense share decreased abruptly to 17% in 1972, and continued to decline throughout the 1980s. Officially, in both 1989 and 1990 the defense share remained at 12%, and for 1991 it was 12.3% with 11.6% planned for 1992. The declining trend is consistent with the government's announced intentions to stimulate economic development and increase the social benefits. However, Western experts estimate that actual military expenditures are higher than budget figures indicate.
After decades of reported steady annual increases on both sides of the ledger, by 1994 income and spending alike had reached 41.5 billion won
(just under US$20 billion at the rate of exchange then). Then Kim Il-Sung
died, and for four years the Supreme People's Assembly
did not meet: supposedly as a sign of mourning, but this was also the worst period of famine
.
When in 1999 the SPA finally reconvened, the then Finance Minister Yun Ki-jong revealed, but did not try to explain, figures of barely 20 billion won for 1998 - meaning both income and spending had plunged by half in just four years. In the 1999 budget, expenditures for the farming and power sectors were increased by 15% and 11%, respectively, compared with those of 1998.
In the 2007 budget it was estimated an increase in revenue at 433.2bn won ($3.072bn, $1=141won). In 2006, 5.9% were considered the public revenue, whereas this year, this figure was raised to 7.1%.
North Korea claims that it is the only state in the world that does not levy tax
es. Taxes were abolished beginning on April 1, 1974.
s called The "People's Life Bonds". It offers no interest over the 10-year lifespan, but, in the event purchasers win in a related lottery, the winner will be entitled to interest when the bonds are redeemed. Buyers of more than 1 million won worth of bonds will also be awarded with a decoration for their expression of affection for the home country by the North Korean government. Moreover, there is evidence that purchase of the bonds was not altogether voluntary, as committees were established in every province, city, county, institute, factory, village, and town to promote their sale as a “patriotic deed".
As was the case with the growth in national output, the pace of growth has slowed markedly since the 1960s. The rate declined from 41.7% and 36.6% a year during the Three-Year Plan and Five-Year Plan, respectively, to 12.8%, 16.3%, and 12.2%, respectively, during the First Seven Year Plan, Six-Year Plan, and Second Seven-Year Plan. As a result of faster growth in industry, that sector's share in total national output increased from 16.8% in 1946 to 57.3% in 1970. Since the 1970s, industry's share in national output has remained relatively stable. From all indications, the pace of industrialization during the Third Seven-Year Plan up to 1991 is far below the planned rate of 9.6%. In 1990 it was estimated that the industrial sector's share of national output was 56%.
Industry's share of the combined total of gross agricultural and industrial output climbed from 28% in 1946 to well over 90% in 1980. Heavy industry received more than 80% of the total state investment in industry between 1954 and 1976 (81.1%, 82.6%, 80%, and 83%, respectively, during the Three-Year Plan, Five-Year Plan, First Seven-Year Plan, and Six-Year Plan), and was overwhelmingly favored over light industry.
North Korea claims to have fulfilled the Second Seven-Year Plan (1978–84) target of raising the industrial output in 1984 to 120% of the 1977 target, equivalent to an average annual growth rate of 12.2%. Judging from the production of major commodities that form the greater part of industrial output, however, it is unlikely that this happened. For example, the increase during the 1978-84 plan period for electric power, coal, steel, metal-cutting machines, tractors, passenger cars, chemical fertilizers, chemical fibers, cement, and textiles, respectively, was 78%, 50%, 85%, 67%, 50%, 20%, 56%, 80%, 78%, and 45%. After South Korea's investment in the Kaesong special economic zone
, computer industry started to emerge.
In the early 1980s, the North Korean economy started to show symptoms of a malfunctioning planned economy; shortages or inefficiency were seen everywhere. Raw materials were in short supply and so were energy and hard currency. Infrastructure decayed and machinery became obsolete. Unlike other socialist countries in the Eastern Europe
, North Korea kept planning highly centralized and refused to liberalize economic management.
In the mid-1980s, the speculation that North Korea would emulate China in establishing Chinese-style special economic zones was flatly denied by then deputy chairman of the Economic Policy Commission Yun Ki-pok (Yun became chairman as of June 1989). China's special economic zones typically are coastal areas established to promote economic development and the introduction of advanced technology through foreign investment
. Investors are offered preferential tax terms and facilities. The zones, which allow greater reliance on market forces, have more decisionmaking power in economic activities than do provincial-level units. Over the years, China has tried to convince the North Korean leadership of the advantages of these zones by giving tours of the various zones and explaining their values to visiting high-level officials.
In April 1982, Kim Il-sung
announced a new economic policy giving priority to increased agricultural production through land reclamation
, development of the country's infrastructure—especially power plants and transportation facilities—and reliance on domestically produced equipment. There also was more emphasis on trade.
In September 1984, North Korea promulgated a joint venture
law to attract foreign capital
and technology
. The new emphasis on expanding trade
and acquiring technology was not, however, accompanied by a shift in priorities away from support of the military. In 1991, North Korea announced the creation of a Special Economic Zone (SEZ) in the northeast regions of Rason (formerly rajin-sonbong) and Ch'ŏngjin
. Investment in this SEZ has been slow in coming. Problems with infrastructure
, bureaucracy
, uncertainties about the security of investments, and viability have hindered growth and development.
and other communities, so an information about it's motor vehicle industry is very limited.
North Korea has no coking coal
, but has substantial reserves of anthracite in Anju
, Aoji (Ŭndŏk
), and other areas. Coal production peaked at 43 million tons in 1989 and steadily declined to 18.6 million tons in 1998. Major causes of coal shortages include mine flooding, and outdated mining technology. As coal was used mainly for industry and electricity generation, decrease in coal production caused serious problems in industrial production and electricity generation. Coal production may not necessarily increase significantly until North Korea imports modern mining technology.
Electricity generation of North Korea peaked in 1989 at about 30 TWh. There were seven large hydroelectric plants in the 1980s. Four were along the Yalu River
, built with Chinese aid, and supplying power to both countries. In 1989, 60% of electricity generation was hydroelectric
and 40% fossil fueled, mostly coal-fired.
In 1997, coal accounted for more than 80% of primary energy consumption and hydropower more than 10%. Net imports of coal represented only about 3% of coal consumption. Hydroelectric power plants generated about 65% of North Korea's electricity and coal-fired thermal plants about 35% in 1997. However, with only 20% of the per capita electricity generation of Japan, the DPRK suffers from chronic supply shortages.
Some hydroelectric facilities are believed to be out of operation due to damages from major flooding in 1995. Coal-fired power plants have been running well under capacity in recent years, due in part to a serious decline in coal supply and in part to problems with transportation of coal. The electricity supply steadily declined and was 17 TWh in 1998. Since electricity generated should double up just to return to the 1989 level, power shortages will continue until coal production increases substantially and generating equipment is refurbished. Transmission losses are reported to be around 30%.
, but also in the smaller modern apartment complexes widespread even in the countryside. These are dwarfed in every sense by "grand monumental edifices". The same may apply even to apparently economically useful projects such as the Namp'o dam, which cost US$4bn.
The years of economic contraction in the 1990s slowed this sector as it did others; the shell of the 105-story Ryugyŏng Hotel
has towered unfinished on Pyongyang
’s skyline for over a decade. The Bank of Korea
claims that construction’s share of GDP fell by almost one-third between 1992 and 1994, from 9.1% to 6.3%. This accords with a rare official figure of 6% for 1993, when the sector was said to have employed 4.2% of the labour force. However, the latter figure excludes the Korean People's Army
, which visibly does much of the country’s construction work.
Farming is concentrated in the flatlands of the four west coast provinces, where a longer growing season, level land, adequate rainfall, and good, irrigated soil permit the most intensive cultivation of crops. A narrow strip of similarly fertile land runs through the eastern seaboard Hamgyŏng
provinces and Kangwŏn Province, but the interior provinces of Chagang and Ryanggang are too mountainous, cold, and dry to allow much farming. The mountains, however, contain the bulk of North Korea's forest reserves while the foothills within and between the major agricultural regions provide lands for livestock grazing and fruit tree cultivation.
Since self-sufficiency remains an important pillar of North Korean ideology, self-sufficiency in food production is deemed a worthy goal. Another aim of government policies—to reduce the "gap" between urban and rural living standards—requires continued investment in the agricultural sector. Finally, as in most countries, changes in the supply or prices of foodstuffs probably are the most conspicuous and sensitive economic concerns for the average citizen. The stability of the country depends on steady, if not rapid, increases in the availability of food items at reasonable prices. In the early 1990s, there also were reports of severe food shortages.
The most far-reaching statement on agricultural policy is embodied in Kim Il Sung's 1964 "Theses on the Socialist Agrarian Question in Our Country," which underscores the government's concern for agricultural development. Kim emphasized technological and educational progress in the countryside as well as collective forms of ownership and management. As industrialization progressed, the share of agriculture, forestry, and fisheries in the total national output declined from 63.5% and 31.4%, respectively, in 1945 and 1946, to a low of 26.8% in 1990. Their share in the labor force also declined from 57.6% in 1960 to 34.4% in 1989.
During field visits, the October 1998 FAO/WFP Mission saw a large proportion of tractors, transplanters, trucks and other farm machinery lying disused or unusable, as well as harvested paddy left in the fields in piles for three weeks or more, resulting in large post-harvest losses. Decreasing ability to carry out mechanized operations (including the pumping of water for irrigation), as well as lack of chemical inputs, was clearly contributing to reduced yields and increased harvesting and post-harvest losses.
received from the former USSR and China was an important factor of its economic growth. In 1991 the former USSR withdrew its support and demanded for payment in hard currency for imports. China stepped in to provide assistance and supplied food and oil, most of it reportedly at concessionary prices. But in 1994 China reduced its exports to North Korea. The rigidity in the political and economic systems of North Korea left the country ill-prepared for a changing world. The North Korean economy was undermined and its industrial output began to decline in 1990. Deprived of industrial inputs, including fertilizers, pesticides, and electricity for irrigation, agricultural output also started to decrease even before North Korea had a series of natural disaster
s in the mid-1990s. This evolution, combined with a series of natural disasters including record floods in 1995, caused one of the worst economic crises in North Korea's history. Other causes of this crisis were high defense spending (about 25% of GDP) and bad governance. It is estimated that between 1992 and 1998 North Korea's economy contracted by 50% and several hundred thousand (possibly up to 3 million) people died of starvation. A former North Korean farmer who has defected reports that despite the famine he was ordered by the government to grow not food but opium
, which was then refined into heroin by the government for international smuggling.
In December 1991, North Korea established a "zone of free economy and trade" to include the northeastern port cities of Unggi (Sŏnbong
), Ch'ŏngjin, and Najin. The establishment of this zone also had ramifications on the questions of how far North Korea would go in opening its economy to the West and to South Korea, the future of the development scheme for the Tumen River
area, and, more important, how much North Korea would reform its economic system.
North Korea announced in December 1993 a 3-year transitional economic policy placing primary emphasis on agriculture, light industry, and foreign trade. However, lack of fertilizer, natural disasters, and poor storage and transportation practices have left the country more than a million tons per year short of grain self-sufficiency. Moreover, lack of foreign exchange to purchase spare parts and oil for electricity generation left many factories idle.
Despite these problems, there seems little immediate prospect that North Korea will undergo an East German-style collapse: a prospect that South Korea and China view with great trepidation because of fear of sudden and large exodus of North Korean refugees into their countries. In 2002 Kim Jong Il declared that "money should be capable of measuring the worth of all commodities", followed by some small market economy relaxations and creation of the Kaesong Industrial Region
with good transport links to South Korea. Experiments are under way to allow factory managers to fire underperforming workers and give bonuses. China’s investment increased from about $1 million in 2003 to $200 million in 2004. China has counseled North Korea’s leaders to gradually open the economy to market forces.
As of 2007, North Korea's economy remained one of the world's most highly centralized and planned, even by pre-1990 communist standards. Complete "socialization" of the economy was accomplished by 1958, when private ownership of the means of production, land, and commercial enterprises was replaced by state or cooperative (collective) ownership and control. As a result, industrial firms were either state-owned or cooperatives, the former contributing more than 90% of total industrial output in the 1960s.
As a consequence of the government's policy of establishing economic self-sufficiency, the North Korean economy has become increasingly isolated from that of the rest of the world, and its industrial development and structure do not reflect its international competitiveness. Domestic firms are shielded from international as well as domestic competition; the result is chronic inefficiency, poor quality, limited product diversity, and underutilization of plants. This protectionism
also limits the size of the market for North Korean producers, which prevents taking advantage of economies of scale.
At the same time, the years of famine were also marked by dramatic revival of private market activities, often technically illegal. Smuggling boomed, and up to 250,000 North Koreans moved to China. The widespread government corruption led to a near complete collapse of old controls and regulations which were not enforced any more. When fuel became scarce while demand for logistics rose, so-called servi-cha (， “service cars”) operations formed, wherein an entrepreneur provides transportation to businesses, institutions and individuals without access to other means of transportation, while the car is formally owned by a legitimate enterprise or unit that also provides transportation permits. Some experts have described the process as "capitalism from below" or "natural death of North Korean Stalinism". The average official salary in 2011 was equivalent to $2 per month while the actual monthly income seems to be around $15 because most North Koreans earn money in illegal small businesses: trade, subsistence farming, and handicrafts. The illegal economy is dominated by women because men have to attend their places of official work even though most of the factories are non-functioning.
. By 1960s, market elements had been suppressed almost completely. Almost all items, from food to clothes, have traditionally been handed out through a public distribution system, with money only having a symbolic meaning. Ratios of food depend on hierarchy
in the system, whereas the positions seem to be semi-hereditary
. Until late 1980s, peasants were not allowed to cultivate private garden plots.
Since the government is the dominant force in the development and management of the economy, bureaus and departments have proliferated at all administrative levels. There are fifteen committees—such as the agricultural and state planning committees—one bureau, and twenty departments under the supervision of the State Administration Council; of these, twelve committees—one bureau, and sixteen departments are involved in economic management. In the early 1990s, several vice premiers of the State Administration Council supervised economic affairs. Organizations undergo frequent reorganization. Many of these agencies have their own separate branches at lower levels of government while others maintain control over subordinate sections in provincial and county administrative agencies.
, the nonconvertible North Korean currency. The South Korean government's estimate placed North Korea's GNP in 1991 at US$22.9 billion, or US$1,038 per capita. In contrast, South Korea posted US$237.9 billion of GNP and a per capita income of US$5,569 in 1991. North Korea's GNP in 1991 showed a 5.2% decline from 1989, and preliminary indications were that the decline would continue. South Korea's GNP, by contrast, expanded by 9.3% and 8.4%, respectively, in 1990 and 1991.
It is estimated that North Korea's GNP nearly halved between 1990 and 1999.
During what North Korea called the "peaceful construction" period before the Korean War, the fundamental task of the economy was to overtake the level of output and efficiency attained toward the end of the Japanese occupation
; to restructure and develop a viable economy reoriented toward the communist-bloc countries; and to begin the process of socializing the economy. Nationalization of key industrial enterprises and land reform, both of which were carried out in 1946, laid the groundwork for two successive one-year plans in 1947 and 1948, respectively, and the Two-Year Plan of 1949-50. It was during this period that the piece-rate wage system and the independent accounting system began to be applied and that the commercial network increasingly came under state and cooperative ownership.
The basic goal of the Three-Year Plan, officially named "The Three-Year Post-war Reconstruction Plan of 1954-56", was to reconstruct an economy torn by the Korean War. The plan stressed more than merely regaining the prewar output levels. The Soviet Union, other East European countries and China provided reconstruction assistance. The highest priority was developing heavy industry, but an earnest effort to collectivize farming also was begun. At the end of 1957, output of most industrial commodities had returned to 1949 levels, except for a few items such as chemical fertilizers, carbides, and sulfuric acid
, whose recovery took longer.
Having basically completed the task of reconstruction, the state planned to lay a solid foundation for industrialization while completing the socialization process and solving the basic problems of food and shelter during the Five-Year Plan of 1957–60. The socialization process was completed by 1958 in all sectors of the economy, and the Ch'ŏllima Movement was introduced. Although growth rates reportedly were high, there were serious imbalances among the different economic sectors. Because rewards were given to individuals and enterprises that met production quota
s, frantic efforts to fulfill plan targets in competition with other enterprises and industries caused disproportionate growth among various enterprises, between industry
and agriculture
and between light and heavy industries. Because resources were limited and the transportation system suffered bottlenecks, resources were diverted to politically well-connected enterprises or those whose managers complained the loudest. An enterprise or industry that performed better than others often did so at the expense of others. Such disruptions intensified as the target year of the plan approached.
Until the 1960s, North Korea's economy grew much faster than South Korea's. Although P'yongyang was behind in total national output, it was ahead of Seoul in per capita national output, because of its smaller population relative to South Korea. For example, in 1960 North Korea's population was slightly over 10 million persons, while South Korea's population was almost 25 million persons. Annual economic growth rates of 30% and 21% during the Three-Year Plan of 1954-56 and the Five-Year Plan of 1957-60, respectively, were reported. After claiming early fulfillment of the Five-Year Plan in 1959, North Korea officially designated 1960 a "buffer year"—a year of adjustment to restore balances among sectors before the next plan became effective in 1961. Not surprisingly the same phenomenon recurred in subsequent plans. Because the Five-Year Plan was fulfilled early, it became a de facto four-year plan. Beginning in the early 1960s, however, P'yongyang's economic growth slowed until it was stagnant at the beginning of the 1990s.
Various factors explain the very high rate of economic development of the country in the 1950s and the general slowdown since the 1960s. During the reconstruction period after the Korean War, there were opportunities for extensive economic growth—attainable through the communist regime's ability to marshall idle resources and labor and to impose a low rate of consumption
. This general pattern of initially high growth resulting in a high rate of capital formation was mirrored in other Soviet-type economies. Toward the end of the 1950s, as reconstruction work was completed and idle capacity began to diminish, the economy had to shift from the extensive to the intensive stage, where the simple communist discipline of marshaling underutilized resources became less effective. In the new stage, inefficiency arising from emerging bottlenecks led to diminishing returns
. Further growth would only be attained by increasing efficiency and technological progress.
Beginning in the early 1960s, a series of serious bottlenecks began to impede development. Bottlenecks were pervasive and generally were created by the lack of arable land, skilled labor, energy
, and transportation, and deficiencies in the extractive industries. Moreover, both land and marine transportation lacked modern equipment and modes of transportation. The inability of the energy and extractive industries as well as of the transportation network to supply power and raw materials as rapidly as the manufacturing plants could absorb them began to slow industrial growth.
The First Seven-Year Plan (initially 1961-67) built on the groundwork of the earlier plans but changed the focus of industrialization. Heavy industry, with the machine tool industry as its linchpin, was given continuing priority. During the plan, however, the economy experienced widespread slowdowns and reverses for the first time, in sharp contrast to the rapid and uninterrupted growth during previous plans. Disappointing performance forced the planners to extend the plan three more years, until 1970. During the last part of the de facto ten-year plan, emphasis shifted to pursuing parallel development of the economy and of defense capabilities. This shift was prompted by concern over the military takeover in South Korea by General Park Chung Hee (1961–79), escalation of the United States involvement in Vietnam
, and the widening Sino-Soviet split
. It was thought that stimulating a technological revolution in the munitions industry was one means to achieve these parallel goals. In the end, the necessity to divert resources to defense became the official explanation for the plan's failure.
The Six-Year Plan of 1971-76 followed immediately in 1971. In the aftermath of the poor performance of the preceding plan, growth targets of the Six-Year Plan were scaled down substantially. Because some of the proposed targets in the First Seven-Year Plan had not been attained even by 1970, the Six-Year Plan did not deviate much from its predecessor in basic goals. The Six-Year Plan placed more emphasis on technological advance, self-sufficiency (Juche
) in industrial raw materials, improving product quality, correcting imbalances among different sectors, and developing the power and extractive industries; the last of these had been deemed largely responsible for slowdowns during the First Seven-Year Plan. The plan called for attaining a self- sufficiency rate of 60-70% in all industrial sectors by substituting domestic raw materials wherever possible and by organizing and renovating technical processes to make the substitution feasible. Improving transport capacity was seen as one of the urgent tasks in accelerating economic development—it was one of the major bottlenecks of the Six-Year Plan.
North Korea claimed to have fulfilled the Six-Year Plan by the end of August 1975, a full year and four months ahead of schedule. Under the circumstances, it was expected that the next plan would start without delay in 1976, a year early, as was the case when the First Seven-Year Plan was instituted in 1961. Even if the Six-Year Plan had been completed on schedule, the next plan should have started in 1977. However, it was not until nearly two years and four months later that the long-awaited plan was unveiled—1977 had become a "buffer year."
The inability of the planners to continuously formulate and institute economic plans reveals as much about the inefficacy of planning itself as the extent of the economic difficulties and administrative disruptions facing the country. For example, targets for successive plans have to be based on the accomplishments of preceding plans. If these targets are underfulfilled, all targets of the next plan—initially based on satisfaction of the plan—have to be reformulated and adjusted. Aside from underfulfillment of the targets, widespread disruptions and imbalances among various sectors of the economy further complicate plan formulation.
The basic thrust of the Second Seven-Year Plan (1978–84) was to achieve the three-pronged goals of self-reliance, modernization, and "scientification." Although the emphasis on self-reliance was not new, it had not previously been the explicit focus of an economic plan. This new emphasis might have been a reaction to mounting foreign debt originating from large-scale imports of Western machinery and equipment in the mid- 1970s. Through modernization North Korea hoped to increase mechanization and automation in all sectors of the economy. "Scientification" means the adoption of up-to-date production and management techniques. The specific objectives of the economic plan were to strengthen the fuel, energy, and resource bases of industry through priority development of the energy and extractive industries; to modernize industry; to substitute domestic resources for certain imported raw materials; to expand freight-carrying capacity in railroad, road, and marine transportation systems; to centralize and containerize the transportation system; and to accelerate a technical revolution in agriculture.
In order to meet the manpower and technology requirements of an expanding economy, the education sector also was targeted for improvements. The quality of the comprehensive eleven-year compulsory education system was to be enhanced to train more technicians and specialists, and to expand the training of specialists, particularly in the fields of fuel, mechanical, electronic, and automation engineering.
Successful fulfillment of the so-called nature-remaking projects also was part of the Second Seven-Year Plan. These projects referred to the five-point program for nature transformation unveiled by Kim Il Sung in 1976: completing the irrigation of non-paddy fields; reclaiming 1,000 square kilometres of new land; building 1,500 to 2,000 km² of terraced fields; carrying out afforestation and water conservation work; and reclaiming tidal land.
From all indications, the Second Seven-Year Plan was not successful. North Korea generally downplayed the accomplishments of the plan, and no other plan received less official fanfare. It was officially claimed that the economy had grown at an annual rate of 8.8% during the plan, somewhat below the planned rate of 9.6%. The reliability of this aggregate measure, however, is questionable. During the plan, the target annual output of 10 million tons of grains
(cereals and pulses) was attained. However, by official admission, the targets of only five other commodities were fulfilled. Judging from the growth rates announced for some twelve industrial products, it is highly unlikely that the total industrial output increased at an average rate of 12.2% as claimed. After the plan concluded, there was no new economic plan for two years, indications of both the plan's failure and the severity of the economic and planning problems confronting the economy in the mid-1980s.
, which represents the entire urban population, receives food through this government-run system. Before the floods, recipients were generally allotted 600-700 grams per day while high officials, military men, heavy laborers, and public security personnel were allotted slightly larger portions of 700-800 grams per day. Decreases in production affected the quantity of food available through the public distribution system. Shortages were compounded when the North Korean government imposed further restrictions on collective farmers. When farmers, who had never been covered by the PDS, were mandated by the government to reduce their own food allotments from 167 kilograms to 107 kilograms of grain per person each year, they responded by withholding portions of the required amount of grain. Famine refugees
reported that the government decreased PDS rations to 150 grams in 1994 and to as low as 30 grams by 1997. It was further reported that the PDS failed to provide any food from April to August 1998 (the “lean” season) as well as from March to June 1999. In January 1998, the North Korean government publicly announced that the PDS would no longer distribute rations and that families needed to somehow procure their own food supplies. By 2005 the PDS was only supplying households with approximately one half of an absolute minimum caloric need. Daily per person rations were halved in July 2011 to 200 grams. It is estimated that in the early 2000s, the average North Korean family drew some 80% of its income from small businesses that are legal in market economies but illegal in North Korea.
Labor force (20 million) - by occupation:
It is also estimated that imports of arms from the USSR in the period 1988 to 1990 accounted for around 30% of the DPRK's total imports, and that between 1981 and 1989 the DPRK earned approximately $4 billion from the export of arms, approximately 30% of the DPRK's total exports in that period. The nominal dollar value of arms exports from the DPRK in 1996 is estimated to have been around $50 million. North Korea’s foreign trade continued to deteriorate in the 1990s. After hitting the bottom of $1.4 billion in 1998, it recovered slightly. North Korea’s trade total in 2002 was $2.7 billion: only about 50% of $5.2 billion in 1988, even in nominal US dollars. These figures exclude intra-Korean trade, deemed internal, which rose in 2002 to $641 million.
In addition to Kaesŏng and Kŭmgang-san, other special economic areas have been established at Sinŭiju
in the northwest (on the border with China), and at Rasŏn in the northeast (on the border with China and Russia).
International sanctions
have impeded international trade to some degree, many related to North Korea's development of weapons of mass destruction
. President Obama approved a new executive order in April 2011 that declares “the importation into the United States, directly or indirectly, of any goods, services, or technology from North Korea is prohibited.” Operational sanctions include:
The Taep'oong International Investment Group of Korea
is the official company that manages oversea investments to North Korea.
of President Kim Dae Jung
. Many firms have agreed to invest in North Korea, encouraged by the South Korean government's commitment to cover their losses, should investment projects in the north fail to become profitable.
Following a 1988 decision by the South Korean Government to allow trade with the North (see Reunification efforts since 1971), South Korean firms began to import North Korean goods. Direct trade with the South began in the fall of 1990 after the unprecedented September 1990 meeting of the two Korean Prime Minister
s. Trade between the countries increased from $18.8 million in 1989 to $333.4 million in 1999, much of it processing or assembly work undertaken in the North.
During this decade, the chairman of the South Korean company Daewoo
visited North Korea and reached agreement on building a light industrial complex at Namp'o
. In other negotiations, Hyundai Asan
obtained permission to bring tour groups by sea to Kŭmgang-san on the North Korea's southeast coast (see Kŭmgang-san Tourist Region), and more recently to construct the 800 acres (3.2 km²) Kaesŏng Industrial Park, near the Demilitarized Zone
(DMZ), at a cost of more than $1 billion.
In response to the summit between Kim Jong-il
and Kim Dae-jung in 2000, North and South Korea agreed in August 2000 to reconnect the section of the Seoul
-P'yŏngyang
Gyeongui Railway Line
across the DMZ. In addition, the two governments said they would build a four-lane highway bypassing the truce village at P'anmunjŏm
. Once these projects are complete, the Kaesŏng industrial park will have ready access to South Korean markets and ports.
TV commercials for Samsung’s
Anycall
cell phone featuring North Korean dancer Cho Myong-ae and South Korea’s Lee Hyo-ri were first broadcast on June 11, 2006.
Some trade was cut off after the ROKS Cheonan sinking
, for which South Korea blamed North Korea.
and Chinese enterprises are known to be involved in a variety of activities in trade and manufacturing in North Korea. European enterprises founded in 2005 the European Business Association (EBA), Pyongyang, a de facto chamber of commerce
representing a number of European-invested joint ventures and other businesses. Ch'ongryŏn, the pro-DPRK General Association of Korean Residents in Japan, broadcast on their TV in 2008 a TV film in 3 parts featuring foreign investment and business in North Korea. This film was put on YouTube on a channel called "BusinessNK" and can be watched together with a number of other videos on foreign joint ventures as well as other investment and business activities in North Korea.
Though no international banks now operate in the isolated socialist state, foreign companies are increasingly interested in dealing with North Korea.
The flat LCD television factory in North Korea is funded by the Ch'ongryŏn.
North Korea approved to open branches of Coca Cola and KFC in North Korea.
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
of North Korea
North Korea
The Democratic People’s Republic of Korea , , is a country in East Asia, occupying the northern half of the Korean Peninsula. Its capital and largest city is Pyongyang. The Korean Demilitarized Zone serves as the buffer zone between North Korea and South Korea...
is an industrialized and centrally planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
.
North Korea's economy remains one of the world's last centrally planned systems. The role of market allocation
Allocation
Allocation may refer to:* Computers** Delayed allocation** Block allocation map** FAT** IP address allocation** Memory allocation** C++ allocators** No-write allocation ** Register allocation* Economics** Economic system** Asset allocation...
is sharply limited – mainly in the rural sector where some peasants sell produce from small private plots. There are almost no legal small business
Small business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...
es, but illegal small business are very common. Although there have been scattered and limited attempts at decentralization
Decentralization
__FORCETOC__Decentralization or decentralisation is the process of dispersing decision-making governance closer to the people and/or citizens. It includes the dispersal of administration or governance in sectors or areas like engineering, management science, political science, political economy,...
, as of mid-1993, Pyongyang
Pyongyang
Pyongyang is the capital of the Democratic People's Republic of Korea, commonly known as North Korea, and the largest city in the country. Pyongyang is located on the Taedong River and, according to preliminary results from the 2008 population census, has a population of 3,255,388. The city was...
's basic adherence to a rigid centrally planned economy continues, as does its reliance on fundamentally non-monetary incentives. The collapse
Revolutions of 1989
The Revolutions of 1989 were the revolutions which overthrew the communist regimes in various Central and Eastern European countries.The events began in Poland in 1989, and continued in Hungary, East Germany, Bulgaria, Czechoslovakia and...
of communist governments around the world in 1991, particularly North Korea's principal source of support, the Soviet Union, have forced North Korean economy to realign its foreign economic relations. Economic exchanges with South Korea have even begun in earnest ways at times, see Kaesong Industrial Region
Kaesong Industrial Region
Kaesŏng Industrial Region is a special administrative industrial region of North Korea. It was formed in 2002 from part of Kaesŏng Directly Governed City.-Kaesŏng Industrial Park:...
.
Colonial Period and Post World War
Beginning in the mid-1920s, the Japanese colonial administration concentrated its industrial development efforts in the comparatively under-populated and resource-rich northern portion of Korea, resulting in a considerable movement of people northward from the agrarian southern provinces of the Korean Peninsula.This trend was not reversed until after the end of World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, when more than 2 million Koreans moved from North to South following the division of Korea
Division of Korea
The division of Korea into North Korea and South Korea stems from the 1945 Allied victory in World War II, ending Japan's 35-year colonial rule of Korea. In a proposal opposed by nearly all Koreans, the United States and the Soviet Union agreed to temporarily occupy the country as a trusteeship...
into Soviet
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
and American military
United States Army Military Government in Korea
The United States Army Military Government in Korea, also known as USAMGIK, was the official ruling body of the southern half of the Korean Peninsula from September 8, 1945 to August 15, 1948...
zones of administration. This southward exodus continued after the establishment of the Democratic People's Republic of Korea (North Korea) in 1948 and during the 1950–53 Korean War
Korean War
The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...
. The North Korean population
Demographics of North Korea
This article is about the demographic features of the population of North Korea, including population density, ethnicity, education level, health of the populace, economic status, religious affiliations and other aspects of the population....
as of October 2008 was given as 24 million, compared with 48–50 million
Demographics of South Korea
This article is about the demographic features of the population of South Korea, including population density, ethnicity, education level, health of the populace, economic status, religious affiliations and other aspects of the population.-Background:...
in South Korea.
The post-World War II division of the Korean Peninsula
Division of Korea
The division of Korea into North Korea and South Korea stems from the 1945 Allied victory in World War II, ending Japan's 35-year colonial rule of Korea. In a proposal opposed by nearly all Koreans, the United States and the Soviet Union agreed to temporarily occupy the country as a trusteeship...
resulted in imbalances of natural and human resources, with disadvantages for both the North and the South. By most economic measures, after partition the North was better off in terms of industry and natural resources. The South, however, had two-thirds of the work force. In 1945, about 65% of Korean heavy industry was in the North but only 31% of light industry, 37% of agriculture, and 18% of the peninsula's total commerce.
North and South both suffered from the massive destruction caused during the Korean War. In the years immediately after the war, North Korea mobilized its labour force and natural resources in an effort to achieve rapid economic development. Large amounts of aid from other communist countries, notably the Soviet Union and the People's Republic of China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
, helped the regime achieve a high growth rate in the immediate postwar period.
Efforts at modernization
In 1979 North Korea renegotiated much of its international debt, but in 1980 it defaultedDefault (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
on all of its loans except those from Japan. By the end of 1986, hard-currency
Hard currency
Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...
debt had reached more than USD 1 billion
1000000000 (number)
1,000,000,000 is the natural number following 999,999,999 and preceding 1,000,000,001.In scientific notation, it is written as 109....
. It also owed nearly USD 2 billion to communist creditors, principally the Soviet Union. The Japanese also declared North Korea in default. By 2000, taking into account penalties and accrued interest, North Korea's debt was estimated at USD 10-12 billion.
Largely because of these debt problems but also because of a prolonged drought and mismanagement, North Korea's industrial growth slowed, and per capita GNP fell below that of the South. By the end of 1979 per capita GNP in North Korea was about one-third of that in the South. The causes for this relatively poor performance are complex, but a major factor is the disproportionately large percentage of GNP (possibly as much as 25%) that North Korea devotes to the military.
There have been some minor efforts toward relaxing central control of the economy in the 1980s that involve industrial enterprises. Encouraged by Kim Jong Il's call to strengthen the implementation of the independent accounting system of enterprises in March 1984, interest in enterprise management and the independent accounting system has increased, as evidenced by increasing coverage of the topic in various North Korean journals. Under the system, factory managers still are assigned output targets but are given more discretion in making decisions about labour, equipment, materials, and funds.
In addition to fixed capital, each enterprise is allocated a minimum of working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
from the state through the Central Bank
Central Bank of the Democratic People's Republic of Korea
The Central Bank of the Democratic People's Republic of Korea is North Korea's central bank. Established on December 6, 1947, it issues the North Korean wŏn. Ri Kwang-gon is its president since April 2009.-History:...
and is required to meet various operating expenses with the proceeds from sales of its output. Up to 50% of the "profit" is taxed, the remaining half being kept by the enterprise for purchase of equipment, introduction of new technology, welfare benefits, and bonuses. As such, the system provides some built-in incentives and some degree of micro-level autonomy, unlike the budget allocation system, under which any surplus is turned over to the government in its entirety.
Another innovation, the August Third People's Consumer Goods Production Movement, is centred on consumer goods production. This measure was so named after Kim Jong Il made an inspection tour of an exhibition of light industrial products held in Pyongyang on August 3, 1984. The movement charges workers to use locally available resources and production facilities to produce needed consumer goods. On the surface, the movement does not appear to differ much from the local industry programs in existence since the 1960s, although some degree of local autonomy is allowed. However, a major departure places output, pricing, and purchases outside central planning. In addition, direct sales stores have been established to distribute goods produced under the movement directly to consumers. The movement is characterized as a third sector in the production of consumer goods, alongside centrally controlled light industry and locally controlled traditional light industry. Moreover, there were some reports in the mid-1980s of increasing encouragement of small-scale private handicrafts and farm markets. As of 1992, however, no move was reported to expand the size of private garden plots.
All these measures appear to be minor stop-gap measures to alleviate severe shortages of consumer goods by infusing some degree of incentives. In mid-1993 no significant moves signalling a fundamental deviation from the existing system had occurred. The reluctance to initiate reform appears to be largely political. It is, perhaps, the linkage between economic reform and political liberalization that worries the leadership. This concern is based on the belief that economic reform will produce new interests that will demand political expression, and that demands for the institutionalization of such pluralism eventually will lead to political liberalization. There clearly exists a catch-22
Catch-22 (logic)
A Catch-22, coined by Joseph Heller in his novel Catch-22, is a logical paradox arising from a situation in which an individual needs something that can only be acquired with an action that will lead him to that very situation he is already in; therefore, the acquisition of this thing becomes...
situation for Kim Il Sung and, particularly, for Kim Jong Il. In order to legitimize his power base, the younger Kim needs an economic base. However, his economic reforms challenge his position as the advancer of Juche
Juche
Juche or Chuch'e is a Korean word usually translated as "self-reliance." In the Democratic People's Republic of Korea , "Juche" refers specifically to a political thesis of Kim Il-sung, the Juche Idea, that identifies the Korean masses as the masters of the country's development...
and may eventually undo the regime.
Beginning in the mid-1980s, and particularly around the end of the decade, North Korea began slowly to modify its rigid self-reliant policy. The changes, popularly identified as the open-door policy, included an increasing emphasis on foreign trade, a readiness to accept direct foreign investment by enacting a joint venture law, the decision to open the country to international tourism, and economic cooperation with South Korea.
The main targets of the Third Seven-Year Plan of 1987–93 were to achieve the "Ten Long-Range Major Goals of the 1980s for the Construction of the Socialist Economy". These goals, conceived in 1980, were to be fulfilled by the end of the decade. The fact that these targets were rolled over to the end of the Third Seven-Year Plan is another indication of the disappointing economic performance during the Second Seven-Year Plan. The three policy goals of self-reliance, modernization, and scientification were repeated. Economic growth was set at 7.9% annually, lower than the previous plan. Although achieving the ten major goals of the 1980s is the main thrust of the Third Seven-Year Plan, some substantial changes have been made in specific quantitative targets. For example, the target for the annual output of steel has been reduced by a third, from 15 million tons to 10 million tons. The output targets of cement and non-ferrous metals—two major export items—have been increased significantly. The June 1989 introduction of the Three-Year Plan for Light Industry as part of the Third Seven-Year Plan is intended to boost the standard of living
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
by addressing consumer needs.
The Third Seven-Year Plan gave a great deal of attention to developing foreign trade and joint ventures, the first time a plan has addressed these issues. By the end of 1991, however, two years before the termination of the plan, no quantitative plan targets had been made public, an indication that the plan has not fared well. The diversion of resources to build highways, theatres, hotels, airports, and other facilities in order to host the Thirteenth World Festival of Youth and Students in July 1989, must have had a negative impact on industrial and agricultural development, although the expansion and improvement of social infrastructure have resulted in some long-term economic benefits.
North Korea announced in December 1993 a 3-year transitional economic policy placing primary emphasis on agriculture, light industry, and foreign trade. However, lack of fertilizer, natural disasters, and poor storage and transportation practices have left the country more than a million tons per year short of grain self-sufficiency. Moreover, lack of foreign exchange to purchase spare parts and oil for electricity generation
Electricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...
left many factories idle.
The shortage of foreign exchange because of a chronic trade deficit, a large foreign debt, and dwindling foreign aid has constrained economic development. In addition, North Korea has been diverting scarce resources from developmental projects to defence; it spent more than 20% of GNP on defence toward the end of the 1980s, a proportion among the highest in the world. These negative factors, compounded by the declining efficiency of the central planning system and the failure to modernize the economy, have slowed the pace of growth since the 1960s. The demise of the communist regimes in the Soviet Union and East European countries—North Korea's traditional trade partners and benefactors—has compounded the economic difficulties in the early 1990s.
Although general economic policy objectives are decided by the Central People's Committee (CPC), it is the task of the State Planning Committee to translate the broad goals into specific annual and long-term development plans and quantitative targets for the economy as a whole, as well as for each industrial sector and enterprise. Under the basic tenets of the 1964 reforms, the planning process is guided by the principles of "unified planning" and of "detailed planning" .
Under "unified planning," regional committees are established in each province, city, and county to systematically coordinate planning work. These committees do not belong to any regional organization and are directly supervised by the State Planning Committee. As a result of a reorganization in 1969, they are separated into provincial planning committees, city/county committees, and enterprise committees (for large-scale enterprises).
The various planning committees, under the auspices of the State Planning Committee, coordinate their planning work with the existing planning offices of the various economy-related government organizations in each of the corresponding regional and local areas. The system attempts to enable the regional planning staffs to better coordinate with economic establishments in their areas, which are directly responsible to them with regard to planning, as well as to communicate directly with staff at the CPC. "Detailed planning" seeks to construct plans with precise accuracy and scientific methods based on concrete assessment of the available resources, labour, funds, plant capacities, and all other necessary information.
There are four stages in drafting the final national economic plan. The first stage is collecting and compiling preliminary statistical data. These figures, which are used as the basic planning data on the productive capacities of various economic sectors, originally are prepared by lower level economic units and aggregated on a national level by respective departments and committees. Simultaneously, the regional, local, and enterprise planning committees prepare their own data and forward them to the CPC. Through this two-channel system of simultaneous but separate and independent preparation of statistical data by economic units and planning committees, the government seeks to ensure an accurate, objective, and realistic data base unfettered by local and bureaucratic bias. The second stage is preparing the control figures by the CPC based on the preliminary data in accordance with the basic plan goals presented by the Central People's Committee. In the third stage, a draft plan is prepared.
The draft plan, prepared by the CPC, is the result of coordinating all draft figures submitted by the lower level economic units, which, in turn, base their drafts on the control figures handed down from the committee. In the fourth stage, the CPC submits a unified national draft plan to the Central People's Committee and the State Administration Council for confirmation. After approval by the Supreme People's Assembly, the draft becomes final and is distributed to all economic units as well as to regional and local planning committees. The plan then becomes legal and compulsory. Frequent directives from the central government contain changes in the plan targets or incentives for meeting the plan objectives.
Although the central government is most clearly involved in the formulation and evaluation of the yearly and long-term plans, it also reviews summaries of quarterly or monthly progress. Individual enterprises divide the production period into daily, weekly, ten-day, monthly, quarterly, and annual periods. In general, the monthly plan is the basic factory planning period.
The success of an economic plan depends on the quality and detail of information received, the establishment of realistic targets, coordination among different sectors, and correct implementation. High initial growth during the Three-Year Plan and, to a lesser extent, during the Five-Year Plan contributed to a false sense of confidence among the planners. Statistical overreporting—an inherent tendency in an economy where rewards lie in fulfilling the quantitative targets, particularly when the plan target year approaches—leads to overestimation of economic potential, poor product quality, and eventually to plan errors. Inefficient utilization of plants, equipment, and raw materials also add to planning errors. Lack of coordination in planning and production competition among sectors and regions cause imbalances and disrupt input-output relationships. The planning reforms in 1964 were supposed to solve these problems, but the need for correct and detailed planning and strict implementation of plans was so great that their importance was emphasized in the report unveiling the Second Seven-Year Plan, indicating that planning problems persisted in the 1980s.
Ch'ŏngsan-ni Method
The Ch'ŏngsan-ni Method of management was born out of Kim Il Sung's February 1960 visit to the Ch'ŏngsan-ni Cooperative Farm in South P'yŏngan Province. Kim and other members of the KWP Central Committee offered "on-the-spot guidance" and spent four fifteen days instructing and interacting with the workers. The avowed objective of this new method is to combat "bureaucratism" and "formalism" in the farm management system.The leadership claimed that farm workers were unhappy and produced low output because low-ranking functionaries of the Workers' Party of Korea
Workers' Party of Korea
The Workers' Party of Korea is the ruling Communist party of the Democratic People's Republic of Korea , commonly known as North Korea. It is also called the Korean Workers' Party...
, who expounded abstract Marxist
Marxism
Marxism is an economic and sociopolitical worldview and method of socioeconomic inquiry that centers upon a materialist interpretation of history, a dialectical view of social change, and an analysis and critique of the development of capitalism. Marxism was pioneered in the early to mid 19th...
theories and slogans, were using incorrect tactics that failed to motivate. To correct this, the leadership recommended that the workers receive specific guidance in solving production problems and be promised readily available material incentives. The Ch'ŏngsan-ni Method called for high-ranking party officials, party cadres, and administrative officials to emulate Kim Il Sung by making field inspections. The system also provided opportunities for farmers to present their grievances and ideas to leading cadres and managers.
Perhaps more important than involving administrative personnel in on-site inspections was the increased use of material incentives, such as paid vacations, special bonuses, honorific titles, and monetary rewards. In fact, the Ch'ŏngsan-ni Method appeared to accommodate almost any expedient to spur production. The method, however, subsequently was undercut by heavy-handed efforts to increase farm production and amalgamate farms into ever-larger units. Actual improvement in the agricultural sector began with the adoption of the subteam contract system as a means of increasing peasant productivity by adjusting individual incentives to those of the immediate, small working group. Thus the increasing scale of collective farms was somewhat offset by the reduction in the size of the working unit. "On-the-spot guidance" by high government functionaries, however, continues in the early 1990s, as exemplified by Kim Il Sung's visits to such places as the Wangjaesan Cooperative Farm in Onsŏng County
Onsong
Onsŏng is a county in North Hamgyong Province, North Korea, located near the border with China. The administrative center is the town of Onsong...
and the Kyŏngsŏn Branch Experimental Farm of the Academy of Agricultural Sciences between August 20 and 30, 1991.
Taean Work System
The industrial management systemIndustrial organization
Industrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
developed in three distinct stages. The first stage was a period of enterprise autonomy that lasted until December 1946. The second stage was a transitional system based on local autonomy, with each enterprise managed by the enterprise management committee under the direction of the local people's committee. This system was replaced by the "one-man management system" , with management patterned along Soviet lines as large enterprises were nationalized and came under central control. The third stage, the Taean Work System , was introduced in December 1961 as an application and refinement of agricultural management techniques to industry. The Taean industrial management system grew out of the Ch'ŏngsan-ni Method.
The highest managerial authority under the Taean system is the party committee. Each committee consists of approximately 25 to 35 members elected from the ranks of managers, workers, engineers, and the leadership of "working people's organizations" at the factory. A smaller "executive committee", about one-quarter the size of the regular committee, has practical responsibility for day-to-day plant operations and major factory decisions. The most important staff members, including the party committee secretary, factory manager, and chief engineer, make up its membership. The system focuses on co-operation among workers, technicians, and party functionaries at the factory level.
Each factory has two major lines of administration, one headed by the manager, the other by the party committee secretary. A chief engineer and his or her assistants direct a general staff in charge of all aspects of production, planning, and technical guidance. Depending on the size of the factory, varying numbers of deputies oversee factory logistics, marketing, and workers' services. The supply of materials includes securing, storing, and distributing all materials for factory use, as well as storing finished products and shipping them from the factory.
Deputies are in charge of assigning workers to their units and handling factory accounts and payroll. Providing workers' services requires directing any farming done on factory lands, stocking factory retail shops, and taking care of all staff amenities. Deputies in charge of workers' services are encouraged to meet as many of the factory's needs as possible using nearby agricultural cooperatives and local industries.
The secretary of the party committee organizes all political activities in each of the factory party cells and attempts to ensure loyalty to the party's production targets and management goals. According to official claims, all management decisions are arrived at by consensus among the members of the party committee. Given the overwhelming importance of the party in the country's affairs, it seems likely that the party secretary has the last say in any major factory disputes.
The Taean system heralded a more rational approach to industrial management than that practised previously. Although party functionaries and workers became more important to management under the new system, engineers and technical staff also received more responsibility in areas where their expertise could contribute the most. The system recognizes the importance of material as well as "politico-moral" incentives for managing the factory workers. The "internal accounting system", a spin-off of the "independent accounting system", grants bonuses to work teams and workshops that use raw materials and equipment most efficiently. These financial rewards come out of enterprise profits.
A measure of the success of the Taean Work System is its longevity and its continued endorsement by the leadership. In his 1991 New Year's address marking the thirtieth anniversary of the creation of the system, Kim Il Sung said that the
"Taean work system is the best system of economic management. It enables the producer masses to fulfill their responsibility and role as masters and to manage the economy in a scientific and rational manner by implementing the mass line in economic management, and by combining party leadership organically with administrative, economic, and technical guidance."
Mass production campaigns
Parallel to management techniques such as the Ch'ŏngsan-ni Method and the Taean Work System, which were designed to increase output in the course of more normalized and regularized operations of farms and enterprises, the leadership continuously resorts to exhortations and mass campaigns to motivate the workers to meet output targets. The earliest and the most pervasive mass production campaign was the Ch'ŏllima MovementChollima Movement
The Chollima Movement was a state-sponsored movement in North Korea, analogous to the Chinese Great Leap Forward, intended to promote rapid economic development. It was launched in 1956. North Korea intensified the work-harder campaign by launching the "three-revolution movement" in 1973...
. Introduced in 1958, and fashioned after China's Great Leap Forward
Great Leap Forward
The Great Leap Forward of the People's Republic of China was an economic and social campaign of the Communist Party of China , reflected in planning decisions from 1958 to 1961, which aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern...
(1958–60), the Ch'ŏllima Movement organized the labour force into work teams and brigades to compete at increasing production. The campaign was aimed not only at industrial and agricultural workers but also at organizations in education, science, sanitation and health, and culture. In addition to work teams, units eligible for Ch'ŏllima citations included entire factories, factory workshops, and such self-contained units as a ship or a railroad station. The "socialist competition
Socialist competition
Socialist competition or socialist emulation was a form of competition between state enterprises and between individuals practiced in the Soviet Union and in other Eastern bloc states.- Competition vs...
" among the industrial sectors, enterprises, farms, and work teams under the Ch'ŏllima Movement frantically sought to complete the First Five-Year Plan (1957–60), but instead created chaotic disruptions in the economy. The disruptions made it necessary to set aside 1959 as a "buffer year" to restore balance in the economy.
Although the Ch'ŏllima Movement was replaced in the early 1960s by the Ch'ŏngsan-ni Method and the Taean Work System, the regime's reliance on some form of mass campaign continued into the early 1990s. Campaigns conducted after the Ch'ŏllima Movement have been narrower in scope and have concentrated on specific time frames for a particular industry or economic sector. Often, the mass production movement takes the form of a "speed battle"—the "100-day speed battle" being most common. The fact that the leadership has to resort to these campaigns points to the weakness or improper functioning of the regular day-to-day management system, as well as to a lack of incentives for workers to achieve the desired economic results. The leadership frequently resorts to speed battles toward the end of a certain period (such as a month, a year, or a particular economic plan) to reach production targets. The "Speed of the 1990s" is designed to carry out the economic goals of the decade.
Budget and Finance
The state budget is a major government instrument in carrying out the country's economic goals. Expenditures represented about three-quarters of GNP in the mid-1980s—the allocation of which reflected the priorities assigned to different economic sectors. Taxes were abolished in 1974 as "remnants of an antiquated society." This action, however, was not expected to have any significant effect on state revenue because the overwhelming proportion of government funds—an average of 98.1% during 1961-70—was from turnover (sales) taxes, deductions from profits paid by state enterprises, and various user fees on machinery and equipment, irrigationIrrigation
Irrigation may be defined as the science of artificial application of water to the land or soil. It is used to assist in the growing of agricultural crops, maintenance of landscapes, and revegetation of disturbed soils in dry areas and during periods of inadequate rainfall...
facilities, television sets, and water.
In order to provide a certain degree of local autonomy as well as to lessen the financial burden of the central government, a "local budget system" was introduced in 1973. Under this system, provincial authorities are responsible for the operating costs of institutions and enterprises not under direct central government control, such as schools, hospitals, shops, and local consumer goods production. In return, they are expected to organize as many profitable ventures as possible and to turn over profits to the central government.
Around November of every year, the state budget for the following calendar year is drafted, subject to revision around March. Typically, total revenue exceeds expenditure by a small margin, with the surplus carried over to the following year. The largest share of state expenditures goes to the "people's economy," which averaged 67.3% of total expenditures between 1987 and 1990, followed in magnitude by "socio-cultural," "defense," and "administration."
Defense spending, as a share of total expenditures, has increased significantly since the 1960s: from 3.7% in 1959 to 19% in 1960, and, after averaging 19.8% between 1961 and 1966, to 30.4% in 1967. After remaining around 30% until 1971, the defense share decreased abruptly to 17% in 1972, and continued to decline throughout the 1980s. Officially, in both 1989 and 1990 the defense share remained at 12%, and for 1991 it was 12.3% with 11.6% planned for 1992. The declining trend is consistent with the government's announced intentions to stimulate economic development and increase the social benefits. However, Western experts estimate that actual military expenditures are higher than budget figures indicate.
After decades of reported steady annual increases on both sides of the ledger, by 1994 income and spending alike had reached 41.5 billion won
Korean won
The won was the currency of Korea between 1902 and 1910. It was subdivided into 100 chon .-Etymology:Won is a cognate of the Chinese yuan and Japanese yen.-History:...
(just under US$20 billion at the rate of exchange then). Then Kim Il-Sung
Kim Il-sung
Kim Il-sung was a Korean communist politician who led the Democratic People's Republic of Korea from its founding in 1948 until his death in 1994. He held the posts of Prime Minister from 1948 to 1972 and President from 1972 to his death...
died, and for four years the Supreme People's Assembly
Supreme People's Assembly
The Supreme People's Assembly is the unicameral parliament of the Democratic People's Republic of Korea , commonly known as North Korea...
did not meet: supposedly as a sign of mourning, but this was also the worst period of famine
North Korean famine
'The North Korean famine was a famine in North Korea which began in the early 1990s...
.
When in 1999 the SPA finally reconvened, the then Finance Minister Yun Ki-jong revealed, but did not try to explain, figures of barely 20 billion won for 1998 - meaning both income and spending had plunged by half in just four years. In the 1999 budget, expenditures for the farming and power sectors were increased by 15% and 11%, respectively, compared with those of 1998.
In the 2007 budget it was estimated an increase in revenue at 433.2bn won ($3.072bn, $1=141won). In 2006, 5.9% were considered the public revenue, whereas this year, this figure was raised to 7.1%.
North Korea claims that it is the only state in the world that does not levy tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es. Taxes were abolished beginning on April 1, 1974.
Bonds
Since 2003 North Korean authorities issue government bondGovernment bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
s called The "People's Life Bonds". It offers no interest over the 10-year lifespan, but, in the event purchasers win in a related lottery, the winner will be entitled to interest when the bonds are redeemed. Buyers of more than 1 million won worth of bonds will also be awarded with a decoration for their expression of affection for the home country by the North Korean government. Moreover, there is evidence that purchase of the bonds was not altogether voluntary, as committees were established in every province, city, county, institute, factory, village, and town to promote their sale as a “patriotic deed".
Industry
North Korea's self-reliant development strategy assigned top priority to developing heavy industry, with parallel development in agriculture and light industry. This policy was achieved mainly by giving heavy industry preferential allocation of state investment funds. More than 50% of state investment went to the industrial sector during the 1954-76 period (47.6%, 51.3%, 57.0%, and 49.0%, respectively, during the Three-Year Plan, Five-Year Plan, First Seven-Year Plan, and Six-Year Plan). As a result, gross industrial output grew rapidly.As was the case with the growth in national output, the pace of growth has slowed markedly since the 1960s. The rate declined from 41.7% and 36.6% a year during the Three-Year Plan and Five-Year Plan, respectively, to 12.8%, 16.3%, and 12.2%, respectively, during the First Seven Year Plan, Six-Year Plan, and Second Seven-Year Plan. As a result of faster growth in industry, that sector's share in total national output increased from 16.8% in 1946 to 57.3% in 1970. Since the 1970s, industry's share in national output has remained relatively stable. From all indications, the pace of industrialization during the Third Seven-Year Plan up to 1991 is far below the planned rate of 9.6%. In 1990 it was estimated that the industrial sector's share of national output was 56%.
Industry's share of the combined total of gross agricultural and industrial output climbed from 28% in 1946 to well over 90% in 1980. Heavy industry received more than 80% of the total state investment in industry between 1954 and 1976 (81.1%, 82.6%, 80%, and 83%, respectively, during the Three-Year Plan, Five-Year Plan, First Seven-Year Plan, and Six-Year Plan), and was overwhelmingly favored over light industry.
North Korea claims to have fulfilled the Second Seven-Year Plan (1978–84) target of raising the industrial output in 1984 to 120% of the 1977 target, equivalent to an average annual growth rate of 12.2%. Judging from the production of major commodities that form the greater part of industrial output, however, it is unlikely that this happened. For example, the increase during the 1978-84 plan period for electric power, coal, steel, metal-cutting machines, tractors, passenger cars, chemical fertilizers, chemical fibers, cement, and textiles, respectively, was 78%, 50%, 85%, 67%, 50%, 20%, 56%, 80%, 78%, and 45%. After South Korea's investment in the Kaesong special economic zone
Kaesong
Kaesŏng is a city in North Hwanghae Province, southern North Korea , a former Directly Governed City, and the capital of Korea during the Koryo Dynasty. The city is near Kaesŏng Industrial Region and it contains the remains of the Manwoldae palace. It was formally named Songdo while it was the...
, computer industry started to emerge.
In the early 1980s, the North Korean economy started to show symptoms of a malfunctioning planned economy; shortages or inefficiency were seen everywhere. Raw materials were in short supply and so were energy and hard currency. Infrastructure decayed and machinery became obsolete. Unlike other socialist countries in the Eastern Europe
Eastern bloc
The term Eastern Bloc or Communist Bloc refers to the former communist states of Eastern and Central Europe, generally the Soviet Union and the countries of the Warsaw Pact...
, North Korea kept planning highly centralized and refused to liberalize economic management.
In the mid-1980s, the speculation that North Korea would emulate China in establishing Chinese-style special economic zones was flatly denied by then deputy chairman of the Economic Policy Commission Yun Ki-pok (Yun became chairman as of June 1989). China's special economic zones typically are coastal areas established to promote economic development and the introduction of advanced technology through foreign investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
. Investors are offered preferential tax terms and facilities. The zones, which allow greater reliance on market forces, have more decisionmaking power in economic activities than do provincial-level units. Over the years, China has tried to convince the North Korean leadership of the advantages of these zones by giving tours of the various zones and explaining their values to visiting high-level officials.
In April 1982, Kim Il-sung
Kim Il-sung
Kim Il-sung was a Korean communist politician who led the Democratic People's Republic of Korea from its founding in 1948 until his death in 1994. He held the posts of Prime Minister from 1948 to 1972 and President from 1972 to his death...
announced a new economic policy giving priority to increased agricultural production through land reclamation
Land reclamation
Land reclamation, usually known as reclamation, is the process to create new land from sea or riverbeds. The land reclaimed is known as reclamation ground or landfill.- Habitation :...
, development of the country's infrastructure—especially power plants and transportation facilities—and reliance on domestically produced equipment. There also was more emphasis on trade.
In September 1984, North Korea promulgated a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
law to attract foreign capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
and technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
. The new emphasis on expanding trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
and acquiring technology was not, however, accompanied by a shift in priorities away from support of the military. In 1991, North Korea announced the creation of a Special Economic Zone (SEZ) in the northeast regions of Rason (formerly rajin-sonbong) and Ch'ŏngjin
Chongjin
Ch'ŏngjin is the capital of North Korea's North Hamgyŏng Province and the country's third largest city. From 1960 to 1967 and again from 1977 to 1985, Ch'ŏngjin was administered separately from North Hamgyŏng as a Directly Governed City...
. Investment in this SEZ has been slow in coming. Problems with infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
, bureaucracy
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...
, uncertainties about the security of investments, and viability have hindered growth and development.
Automotive industry
The North Korean motor vehicle production has a military, industrial and construction goals mainly, with private car ownership by citizens not allowed (all cars reserved for government officials). Having Soviet origins, the subsequent practice of cloning foreign specimens and a recent one automobile joint-venture North Korea has developed a wide-range automotive industry with production of all types of vehicles (a urban and off-road mini, luxury, SUV cars, a small, midi, heavy and superheavy cargo, construction and off-road trucks, a mini buses, a usual and articulated buses, trolleybuses and trams) but produces far fewer vehicles than its production capabilities due to permanent economical crisis. DPRK did not join or collaborate the OICAOrganisation Internationale des Constructeurs d'Automobiles
The Organisation Internationale des Constructeurs d'Automobiles, commonly abbreviated OICA , is a federation of automobile manufacturers, based in Paris, founded in 1919...
and other communities, so an information about it's motor vehicle industry is very limited.
Power and energy
The energy sector is one of the most serious bottlenecks in the North Korean economy. Since 1990 the supply of oil, coal, and electricity declined steadily, and seriously affected all sectors of the economy. Crude oil was formerly imported by pipeline at “friendship prices” from the former USSR or China, but the withdrawal of Russian concessions and the reduction of imports from China brought down annual imports from about 23 Moilbbl in 1988 to less than 4 Moilbbl by 1997. As the imported oil was refined for fuels for transportation and agricultural machinery, a serious cutback in oil imports caused critical problems in transportation and agriculture.North Korea has no coking coal
Coke (fuel)
Coke is the solid carbonaceous material derived from destructive distillation of low-ash, low-sulfur bituminous coal. Cokes from coal are grey, hard, and porous. While coke can be formed naturally, the commonly used form is man-made.- History :...
, but has substantial reserves of anthracite in Anju
Anju (city)
Anju-si is a city in the South Pyongan province of North Korea at the coordinates of . Its current population is unknown, but judging from satellite imagery, at least 100,000 people reside there. The Ch'ongch'on River passes through Anju....
, Aoji (Ŭndŏk
Undok
Undok is a kun, or county, in North Hamgyong province, North Korea. Formerly known as Kyŏnghŭng County , it was given its current name in 1977....
), and other areas. Coal production peaked at 43 million tons in 1989 and steadily declined to 18.6 million tons in 1998. Major causes of coal shortages include mine flooding, and outdated mining technology. As coal was used mainly for industry and electricity generation, decrease in coal production caused serious problems in industrial production and electricity generation. Coal production may not necessarily increase significantly until North Korea imports modern mining technology.
Electricity generation of North Korea peaked in 1989 at about 30 TWh. There were seven large hydroelectric plants in the 1980s. Four were along the Yalu River
Yalu River
The Yalu River or the Amnok River is a river on the border between North Korea and the People's Republic of China....
, built with Chinese aid, and supplying power to both countries. In 1989, 60% of electricity generation was hydroelectric
Hydroelectricity
Hydroelectricity is the term referring to electricity generated by hydropower; the production of electrical power through the use of the gravitational force of falling or flowing water. It is the most widely used form of renewable energy...
and 40% fossil fueled, mostly coal-fired.
In 1997, coal accounted for more than 80% of primary energy consumption and hydropower more than 10%. Net imports of coal represented only about 3% of coal consumption. Hydroelectric power plants generated about 65% of North Korea's electricity and coal-fired thermal plants about 35% in 1997. However, with only 20% of the per capita electricity generation of Japan, the DPRK suffers from chronic supply shortages.
Some hydroelectric facilities are believed to be out of operation due to damages from major flooding in 1995. Coal-fired power plants have been running well under capacity in recent years, due in part to a serious decline in coal supply and in part to problems with transportation of coal. The electricity supply steadily declined and was 17 TWh in 1998. Since electricity generated should double up just to return to the 1989 level, power shortages will continue until coal production increases substantially and generating equipment is refurbished. Transmission losses are reported to be around 30%.
Construction
Construction was once an active sector in North Korea. This was demonstrated not only through large housing programmes, of which most were visible in the high-rise apartment blocks in PyongyangPyongyang
Pyongyang is the capital of the Democratic People's Republic of Korea, commonly known as North Korea, and the largest city in the country. Pyongyang is located on the Taedong River and, according to preliminary results from the 2008 population census, has a population of 3,255,388. The city was...
, but also in the smaller modern apartment complexes widespread even in the countryside. These are dwarfed in every sense by "grand monumental edifices". The same may apply even to apparently economically useful projects such as the Namp'o dam, which cost US$4bn.
The years of economic contraction in the 1990s slowed this sector as it did others; the shell of the 105-story Ryugyŏng Hotel
Ryugyong Hotel
The Ryugyong Hotel is a 105-story skyscraper under construction in Pyongyang, North Korea. Its name is also one of the historic names for Pyongyang. The building is also known as the 105 Building, a reference to its number of floors...
has towered unfinished on Pyongyang
Pyongyang
Pyongyang is the capital of the Democratic People's Republic of Korea, commonly known as North Korea, and the largest city in the country. Pyongyang is located on the Taedong River and, according to preliminary results from the 2008 population census, has a population of 3,255,388. The city was...
’s skyline for over a decade. The Bank of Korea
Bank of Korea
The Bank of Korea is the central bank of South Korea and issuer of South Korean won. It was established on June 12, 1950 at Seoul, South Korea.The Bank's primary purpose is price stability. For that, the Bank targets inflation...
claims that construction’s share of GDP fell by almost one-third between 1992 and 1994, from 9.1% to 6.3%. This accords with a rare official figure of 6% for 1993, when the sector was said to have employed 4.2% of the labour force. However, the latter figure excludes the Korean People's Army
Korean People's Army
The Korean People's Army , also known as the Inmin Gun, are the military forces of the Democratic People's Republic of Korea. Kim Jong-il is the Supreme Commander of the Korean People's Army and Chairman of the National Defence Commission...
, which visibly does much of the country’s construction work.
Banking
The Central Bank of North Korea, under the Ministry of Finance, has a network of 227 local branches. Several reissues of banknotes in recent years suggest that citizens are inclined to hoard rather than bank any savings that they make from their incomes; reportedly they now also prefer foreign currency. At least two foreign aid agencies have recently set up microcredit schemes, lending to farmers and small businesses. In late 2009 North Korea revalued its currency.Retail
Until recently the official retail sector was mainly state-controlled, under the direction of the People’s Services Committee. Consumer goods were few and of poor quality, with most provided on a ration basis. There were state-run stores and direct factory outlets for the masses, and special shops with luxuries for the elite—as well as a chain of hard-currency stores (a joint venture with the association of pro-Pyongyang Korean residents in Japan, the Ch'ongryŏn), with branches in large cities.Agriculture, forestry & fishing
The task of increasing agricultural production beyond simple recovery from the Korean War was not easy. The country's sparse agricultural resources limit agricultural growth. Climate, terrain, and soil conditions are not particularly favorable for farming. Only about 18% of the total landmass, or approximately 22,000 km², is arable; the major portion of the country is rugged mountain terrain. The weather varies markedly according to elevation, and lack of precipitation, along with infertile soil, makes land at elevations higher than 400 meters unsuitable for purposes other than grazing. Precipitation is geographically and seasonally irregular, and in most parts of the country as much as half the annual rainfall occurs in the three summer months. This pattern favors the cultivation of paddy rice in warmer regions that are outfitted with irrigation and flood control networks. Where these conditions are lacking, however, farmers have to substitute other grains for the traditional favorite. Rice yields are about 2.8 tonnes per hectare, about half that in most countries, with soil degradation, lack of fertilisers and limited mechanisation blamed.Farming is concentrated in the flatlands of the four west coast provinces, where a longer growing season, level land, adequate rainfall, and good, irrigated soil permit the most intensive cultivation of crops. A narrow strip of similarly fertile land runs through the eastern seaboard Hamgyŏng
Hamgyong
Hamgyŏng was one of the Eight Provinces of Korea during the Joseon Dynasty. Hamgyŏng was located in the northeast of Korea. The provincial capital was Hamhŭng.-History:...
provinces and Kangwŏn Province, but the interior provinces of Chagang and Ryanggang are too mountainous, cold, and dry to allow much farming. The mountains, however, contain the bulk of North Korea's forest reserves while the foothills within and between the major agricultural regions provide lands for livestock grazing and fruit tree cultivation.
Since self-sufficiency remains an important pillar of North Korean ideology, self-sufficiency in food production is deemed a worthy goal. Another aim of government policies—to reduce the "gap" between urban and rural living standards—requires continued investment in the agricultural sector. Finally, as in most countries, changes in the supply or prices of foodstuffs probably are the most conspicuous and sensitive economic concerns for the average citizen. The stability of the country depends on steady, if not rapid, increases in the availability of food items at reasonable prices. In the early 1990s, there also were reports of severe food shortages.
The most far-reaching statement on agricultural policy is embodied in Kim Il Sung's 1964 "Theses on the Socialist Agrarian Question in Our Country," which underscores the government's concern for agricultural development. Kim emphasized technological and educational progress in the countryside as well as collective forms of ownership and management. As industrialization progressed, the share of agriculture, forestry, and fisheries in the total national output declined from 63.5% and 31.4%, respectively, in 1945 and 1946, to a low of 26.8% in 1990. Their share in the labor force also declined from 57.6% in 1960 to 34.4% in 1989.
During field visits, the October 1998 FAO/WFP Mission saw a large proportion of tractors, transplanters, trucks and other farm machinery lying disused or unusable, as well as harvested paddy left in the fields in piles for three weeks or more, resulting in large post-harvest losses. Decreasing ability to carry out mechanized operations (including the pumping of water for irrigation), as well as lack of chemical inputs, was clearly contributing to reduced yields and increased harvesting and post-harvest losses.
Crisis and famine
In the 1990s the North Korean economy saw stagnation turning into crisis. Economic assistanceAid
In international relations, aid is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country....
received from the former USSR and China was an important factor of its economic growth. In 1991 the former USSR withdrew its support and demanded for payment in hard currency for imports. China stepped in to provide assistance and supplied food and oil, most of it reportedly at concessionary prices. But in 1994 China reduced its exports to North Korea. The rigidity in the political and economic systems of North Korea left the country ill-prepared for a changing world. The North Korean economy was undermined and its industrial output began to decline in 1990. Deprived of industrial inputs, including fertilizers, pesticides, and electricity for irrigation, agricultural output also started to decrease even before North Korea had a series of natural disaster
Natural disaster
A natural disaster is the effect of a natural hazard . It leads to financial, environmental or human losses...
s in the mid-1990s. This evolution, combined with a series of natural disasters including record floods in 1995, caused one of the worst economic crises in North Korea's history. Other causes of this crisis were high defense spending (about 25% of GDP) and bad governance. It is estimated that between 1992 and 1998 North Korea's economy contracted by 50% and several hundred thousand (possibly up to 3 million) people died of starvation. A former North Korean farmer who has defected reports that despite the famine he was ordered by the government to grow not food but opium
Opium
Opium is the dried latex obtained from the opium poppy . Opium contains up to 12% morphine, an alkaloid, which is frequently processed chemically to produce heroin for the illegal drug trade. The latex also includes codeine and non-narcotic alkaloids such as papaverine, thebaine and noscapine...
, which was then refined into heroin by the government for international smuggling.
In December 1991, North Korea established a "zone of free economy and trade" to include the northeastern port cities of Unggi (Sŏnbong
Sonbong
Sonbong, formerly called Unggi , is a subdivision of the North Korean city of Rason. It is located at the northeastern extreme of North Korea, bordering Russia and China. It lies on Unggi Bay, an extension of the Sea of Japan . A uranium mine is allegedly located there, as is a 200 megawatt...
), Ch'ŏngjin, and Najin. The establishment of this zone also had ramifications on the questions of how far North Korea would go in opening its economy to the West and to South Korea, the future of the development scheme for the Tumen River
Tumen River
The Tumen River is a 521 km-long river that serves as part of the boundary between China, North Korea, and Russia, rising in Mount Baekdu and flowing into the Sea of Japan....
area, and, more important, how much North Korea would reform its economic system.
North Korea announced in December 1993 a 3-year transitional economic policy placing primary emphasis on agriculture, light industry, and foreign trade. However, lack of fertilizer, natural disasters, and poor storage and transportation practices have left the country more than a million tons per year short of grain self-sufficiency. Moreover, lack of foreign exchange to purchase spare parts and oil for electricity generation left many factories idle.
Despite these problems, there seems little immediate prospect that North Korea will undergo an East German-style collapse: a prospect that South Korea and China view with great trepidation because of fear of sudden and large exodus of North Korean refugees into their countries. In 2002 Kim Jong Il declared that "money should be capable of measuring the worth of all commodities", followed by some small market economy relaxations and creation of the Kaesong Industrial Region
Kaesong Industrial Region
Kaesŏng Industrial Region is a special administrative industrial region of North Korea. It was formed in 2002 from part of Kaesŏng Directly Governed City.-Kaesŏng Industrial Park:...
with good transport links to South Korea. Experiments are under way to allow factory managers to fire underperforming workers and give bonuses. China’s investment increased from about $1 million in 2003 to $200 million in 2004. China has counseled North Korea’s leaders to gradually open the economy to market forces.
As of 2007, North Korea's economy remained one of the world's most highly centralized and planned, even by pre-1990 communist standards. Complete "socialization" of the economy was accomplished by 1958, when private ownership of the means of production, land, and commercial enterprises was replaced by state or cooperative (collective) ownership and control. As a result, industrial firms were either state-owned or cooperatives, the former contributing more than 90% of total industrial output in the 1960s.
As a consequence of the government's policy of establishing economic self-sufficiency, the North Korean economy has become increasingly isolated from that of the rest of the world, and its industrial development and structure do not reflect its international competitiveness. Domestic firms are shielded from international as well as domestic competition; the result is chronic inefficiency, poor quality, limited product diversity, and underutilization of plants. This protectionism
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
also limits the size of the market for North Korean producers, which prevents taking advantage of economies of scale.
At the same time, the years of famine were also marked by dramatic revival of private market activities, often technically illegal. Smuggling boomed, and up to 250,000 North Koreans moved to China. The widespread government corruption led to a near complete collapse of old controls and regulations which were not enforced any more. When fuel became scarce while demand for logistics rose, so-called servi-cha (， “service cars”) operations formed, wherein an entrepreneur provides transportation to businesses, institutions and individuals without access to other means of transportation, while the car is formally owned by a legitimate enterprise or unit that also provides transportation permits. Some experts have described the process as "capitalism from below" or "natural death of North Korean Stalinism". The average official salary in 2011 was equivalent to $2 per month while the actual monthly income seems to be around $15 because most North Koreans earn money in illegal small businesses: trade, subsistence farming, and handicrafts. The illegal economy is dominated by women because men have to attend their places of official work even though most of the factories are non-functioning.
Organization and management
North Korea's economy has been unique in its elimination of marketsMarket economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
. By 1960s, market elements had been suppressed almost completely. Almost all items, from food to clothes, have traditionally been handed out through a public distribution system, with money only having a symbolic meaning. Ratios of food depend on hierarchy
Hierarchy
A hierarchy is an arrangement of items in which the items are represented as being "above," "below," or "at the same level as" one another...
in the system, whereas the positions seem to be semi-hereditary
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...
. Until late 1980s, peasants were not allowed to cultivate private garden plots.
Since the government is the dominant force in the development and management of the economy, bureaus and departments have proliferated at all administrative levels. There are fifteen committees—such as the agricultural and state planning committees—one bureau, and twenty departments under the supervision of the State Administration Council; of these, twelve committees—one bureau, and sixteen departments are involved in economic management. In the early 1990s, several vice premiers of the State Administration Council supervised economic affairs. Organizations undergo frequent reorganization. Many of these agencies have their own separate branches at lower levels of government while others maintain control over subordinate sections in provincial and county administrative agencies.
Size
Estimating gross national product in North Korea is a difficult task because of dearth of economic data, the national income accounting based on the Marxist definition of production, and the problem of choosing an appropriate rate of exchange for the North Korean WonNorth Korean won
The won is the currency of North Korea . It is subdivided into 100 chon. The won is issued by the Central Bank of the Democratic People's Republic of Korea...
, the nonconvertible North Korean currency. The South Korean government's estimate placed North Korea's GNP in 1991 at US$22.9 billion, or US$1,038 per capita. In contrast, South Korea posted US$237.9 billion of GNP and a per capita income of US$5,569 in 1991. North Korea's GNP in 1991 showed a 5.2% decline from 1989, and preliminary indications were that the decline would continue. South Korea's GNP, by contrast, expanded by 9.3% and 8.4%, respectively, in 1990 and 1991.
It is estimated that North Korea's GNP nearly halved between 1990 and 1999.
Economic planning
North Korea, one of the world's most centrally planned and isolated economies, faces desperate economic conditions. Industrial capital stock is nearly beyond repair as a result of years of underinvestment and shortages of spare parts. Industrial and power output have declined in parallel.During what North Korea called the "peaceful construction" period before the Korean War, the fundamental task of the economy was to overtake the level of output and efficiency attained toward the end of the Japanese occupation
Korea under Japanese rule
Korea was under Japanese rule as part of Japan's 35-year imperialist expansion . Japanese rule ended in 1945 shortly after the Japanese defeat in World War II....
; to restructure and develop a viable economy reoriented toward the communist-bloc countries; and to begin the process of socializing the economy. Nationalization of key industrial enterprises and land reform, both of which were carried out in 1946, laid the groundwork for two successive one-year plans in 1947 and 1948, respectively, and the Two-Year Plan of 1949-50. It was during this period that the piece-rate wage system and the independent accounting system began to be applied and that the commercial network increasingly came under state and cooperative ownership.
The basic goal of the Three-Year Plan, officially named "The Three-Year Post-war Reconstruction Plan of 1954-56", was to reconstruct an economy torn by the Korean War. The plan stressed more than merely regaining the prewar output levels. The Soviet Union, other East European countries and China provided reconstruction assistance. The highest priority was developing heavy industry, but an earnest effort to collectivize farming also was begun. At the end of 1957, output of most industrial commodities had returned to 1949 levels, except for a few items such as chemical fertilizers, carbides, and sulfuric acid
Sulfuric acid
Sulfuric acid is a strong mineral acid with the molecular formula . Its historical name is oil of vitriol. Pure sulfuric acid is a highly corrosive, colorless, viscous liquid. The salts of sulfuric acid are called sulfates...
, whose recovery took longer.
Having basically completed the task of reconstruction, the state planned to lay a solid foundation for industrialization while completing the socialization process and solving the basic problems of food and shelter during the Five-Year Plan of 1957–60. The socialization process was completed by 1958 in all sectors of the economy, and the Ch'ŏllima Movement was introduced. Although growth rates reportedly were high, there were serious imbalances among the different economic sectors. Because rewards were given to individuals and enterprises that met production quota
Production quota
A production quota is a goal for the production of a good. It is typically set by a government or an organization, and can be applied to an individual worker, firm, industry or country. Quotas can be set high to encourage production, or can be used to limit production to control the supply of goods...
s, frantic efforts to fulfill plan targets in competition with other enterprises and industries caused disproportionate growth among various enterprises, between industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
and agriculture
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
and between light and heavy industries. Because resources were limited and the transportation system suffered bottlenecks, resources were diverted to politically well-connected enterprises or those whose managers complained the loudest. An enterprise or industry that performed better than others often did so at the expense of others. Such disruptions intensified as the target year of the plan approached.
Until the 1960s, North Korea's economy grew much faster than South Korea's. Although P'yongyang was behind in total national output, it was ahead of Seoul in per capita national output, because of its smaller population relative to South Korea. For example, in 1960 North Korea's population was slightly over 10 million persons, while South Korea's population was almost 25 million persons. Annual economic growth rates of 30% and 21% during the Three-Year Plan of 1954-56 and the Five-Year Plan of 1957-60, respectively, were reported. After claiming early fulfillment of the Five-Year Plan in 1959, North Korea officially designated 1960 a "buffer year"—a year of adjustment to restore balances among sectors before the next plan became effective in 1961. Not surprisingly the same phenomenon recurred in subsequent plans. Because the Five-Year Plan was fulfilled early, it became a de facto four-year plan. Beginning in the early 1960s, however, P'yongyang's economic growth slowed until it was stagnant at the beginning of the 1990s.
Various factors explain the very high rate of economic development of the country in the 1950s and the general slowdown since the 1960s. During the reconstruction period after the Korean War, there were opportunities for extensive economic growth—attainable through the communist regime's ability to marshall idle resources and labor and to impose a low rate of consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
. This general pattern of initially high growth resulting in a high rate of capital formation was mirrored in other Soviet-type economies. Toward the end of the 1950s, as reconstruction work was completed and idle capacity began to diminish, the economy had to shift from the extensive to the intensive stage, where the simple communist discipline of marshaling underutilized resources became less effective. In the new stage, inefficiency arising from emerging bottlenecks led to diminishing returns
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...
. Further growth would only be attained by increasing efficiency and technological progress.
Beginning in the early 1960s, a series of serious bottlenecks began to impede development. Bottlenecks were pervasive and generally were created by the lack of arable land, skilled labor, energy
Energy
In physics, energy is an indirectly observed quantity. It is often understood as the ability a physical system has to do work on other physical systems...
, and transportation, and deficiencies in the extractive industries. Moreover, both land and marine transportation lacked modern equipment and modes of transportation. The inability of the energy and extractive industries as well as of the transportation network to supply power and raw materials as rapidly as the manufacturing plants could absorb them began to slow industrial growth.
The First Seven-Year Plan (initially 1961-67) built on the groundwork of the earlier plans but changed the focus of industrialization. Heavy industry, with the machine tool industry as its linchpin, was given continuing priority. During the plan, however, the economy experienced widespread slowdowns and reverses for the first time, in sharp contrast to the rapid and uninterrupted growth during previous plans. Disappointing performance forced the planners to extend the plan three more years, until 1970. During the last part of the de facto ten-year plan, emphasis shifted to pursuing parallel development of the economy and of defense capabilities. This shift was prompted by concern over the military takeover in South Korea by General Park Chung Hee (1961–79), escalation of the United States involvement in Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
, and the widening Sino-Soviet split
Sino-Soviet split
In political science, the term Sino–Soviet split denotes the worsening of political and ideologic relations between the People's Republic of China and the Union of Soviet Socialist Republics during the Cold War...
. It was thought that stimulating a technological revolution in the munitions industry was one means to achieve these parallel goals. In the end, the necessity to divert resources to defense became the official explanation for the plan's failure.
The Six-Year Plan of 1971-76 followed immediately in 1971. In the aftermath of the poor performance of the preceding plan, growth targets of the Six-Year Plan were scaled down substantially. Because some of the proposed targets in the First Seven-Year Plan had not been attained even by 1970, the Six-Year Plan did not deviate much from its predecessor in basic goals. The Six-Year Plan placed more emphasis on technological advance, self-sufficiency (Juche
Juche
Juche or Chuch'e is a Korean word usually translated as "self-reliance." In the Democratic People's Republic of Korea , "Juche" refers specifically to a political thesis of Kim Il-sung, the Juche Idea, that identifies the Korean masses as the masters of the country's development...
) in industrial raw materials, improving product quality, correcting imbalances among different sectors, and developing the power and extractive industries; the last of these had been deemed largely responsible for slowdowns during the First Seven-Year Plan. The plan called for attaining a self- sufficiency rate of 60-70% in all industrial sectors by substituting domestic raw materials wherever possible and by organizing and renovating technical processes to make the substitution feasible. Improving transport capacity was seen as one of the urgent tasks in accelerating economic development—it was one of the major bottlenecks of the Six-Year Plan.
North Korea claimed to have fulfilled the Six-Year Plan by the end of August 1975, a full year and four months ahead of schedule. Under the circumstances, it was expected that the next plan would start without delay in 1976, a year early, as was the case when the First Seven-Year Plan was instituted in 1961. Even if the Six-Year Plan had been completed on schedule, the next plan should have started in 1977. However, it was not until nearly two years and four months later that the long-awaited plan was unveiled—1977 had become a "buffer year."
The inability of the planners to continuously formulate and institute economic plans reveals as much about the inefficacy of planning itself as the extent of the economic difficulties and administrative disruptions facing the country. For example, targets for successive plans have to be based on the accomplishments of preceding plans. If these targets are underfulfilled, all targets of the next plan—initially based on satisfaction of the plan—have to be reformulated and adjusted. Aside from underfulfillment of the targets, widespread disruptions and imbalances among various sectors of the economy further complicate plan formulation.
The basic thrust of the Second Seven-Year Plan (1978–84) was to achieve the three-pronged goals of self-reliance, modernization, and "scientification." Although the emphasis on self-reliance was not new, it had not previously been the explicit focus of an economic plan. This new emphasis might have been a reaction to mounting foreign debt originating from large-scale imports of Western machinery and equipment in the mid- 1970s. Through modernization North Korea hoped to increase mechanization and automation in all sectors of the economy. "Scientification" means the adoption of up-to-date production and management techniques. The specific objectives of the economic plan were to strengthen the fuel, energy, and resource bases of industry through priority development of the energy and extractive industries; to modernize industry; to substitute domestic resources for certain imported raw materials; to expand freight-carrying capacity in railroad, road, and marine transportation systems; to centralize and containerize the transportation system; and to accelerate a technical revolution in agriculture.
In order to meet the manpower and technology requirements of an expanding economy, the education sector also was targeted for improvements. The quality of the comprehensive eleven-year compulsory education system was to be enhanced to train more technicians and specialists, and to expand the training of specialists, particularly in the fields of fuel, mechanical, electronic, and automation engineering.
Successful fulfillment of the so-called nature-remaking projects also was part of the Second Seven-Year Plan. These projects referred to the five-point program for nature transformation unveiled by Kim Il Sung in 1976: completing the irrigation of non-paddy fields; reclaiming 1,000 square kilometres of new land; building 1,500 to 2,000 km² of terraced fields; carrying out afforestation and water conservation work; and reclaiming tidal land.
From all indications, the Second Seven-Year Plan was not successful. North Korea generally downplayed the accomplishments of the plan, and no other plan received less official fanfare. It was officially claimed that the economy had grown at an annual rate of 8.8% during the plan, somewhat below the planned rate of 9.6%. The reliability of this aggregate measure, however, is questionable. During the plan, the target annual output of 10 million tons of grains
Cereal
Cereals are grasses cultivated for the edible components of their grain , composed of the endosperm, germ, and bran...
(cereals and pulses) was attained. However, by official admission, the targets of only five other commodities were fulfilled. Judging from the growth rates announced for some twelve industrial products, it is highly unlikely that the total industrial output increased at an average rate of 12.2% as claimed. After the plan concluded, there was no new economic plan for two years, indications of both the plan's failure and the severity of the economic and planning problems confronting the economy in the mid-1980s.
Public Distribution System
Since the 1950s, a majority of North Koreans have received their food through the public distribution system (PDS). The PDS forces farmers in agricultural regions to hand over a portion of their production to the government and then reallocates the surplus to urban regions, which cannot grow their own foods. About 62% of the entire North Korean populationDemographics of North Korea
This article is about the demographic features of the population of North Korea, including population density, ethnicity, education level, health of the populace, economic status, religious affiliations and other aspects of the population....
, which represents the entire urban population, receives food through this government-run system. Before the floods, recipients were generally allotted 600-700 grams per day while high officials, military men, heavy laborers, and public security personnel were allotted slightly larger portions of 700-800 grams per day. Decreases in production affected the quantity of food available through the public distribution system. Shortages were compounded when the North Korean government imposed further restrictions on collective farmers. When farmers, who had never been covered by the PDS, were mandated by the government to reduce their own food allotments from 167 kilograms to 107 kilograms of grain per person each year, they responded by withholding portions of the required amount of grain. Famine refugees
North Korean famine
'The North Korean famine was a famine in North Korea which began in the early 1990s...
reported that the government decreased PDS rations to 150 grams in 1994 and to as low as 30 grams by 1997. It was further reported that the PDS failed to provide any food from April to August 1998 (the “lean” season) as well as from March to June 1999. In January 1998, the North Korean government publicly announced that the PDS would no longer distribute rations and that families needed to somehow procure their own food supplies. By 2005 the PDS was only supplying households with approximately one half of an absolute minimum caloric need. Daily per person rations were halved in July 2011 to 200 grams. It is estimated that in the early 2000s, the average North Korean family drew some 80% of its income from small businesses that are legal in market economies but illegal in North Korea.
Labor
Growth and changes in the structure and ownership pattern of the economy also have changed the labor force. By 1958 individual private farmers, who once constituted more than 70% of the labor force, had been transformed into or replaced by state or collective farmers. Private artisans, merchants, and entrepreneurs had joined state or cooperative enterprises. In the industrial sector in 1963, the last year for which such data are available, there were 2,295 state enterprises and 642 cooperative enterprises. The size and importance of the state enterprises can be surmised by the fact that state enterprises, which constituted 78% of the total number of industrial enterprises, contributed 91% of total industrial output.Labor force (20 million) - by occupation:
- Agricultural: 37%
- Industry and services: 63%
External trade
Statistics from North Korea's trade partners is collected by international organizations like the United Nations and the International Monetary Fund, and by South Korean organizations such as the National Unification Board.It is also estimated that imports of arms from the USSR in the period 1988 to 1990 accounted for around 30% of the DPRK's total imports, and that between 1981 and 1989 the DPRK earned approximately $4 billion from the export of arms, approximately 30% of the DPRK's total exports in that period. The nominal dollar value of arms exports from the DPRK in 1996 is estimated to have been around $50 million. North Korea’s foreign trade continued to deteriorate in the 1990s. After hitting the bottom of $1.4 billion in 1998, it recovered slightly. North Korea’s trade total in 2002 was $2.7 billion: only about 50% of $5.2 billion in 1988, even in nominal US dollars. These figures exclude intra-Korean trade, deemed internal, which rose in 2002 to $641 million.
In addition to Kaesŏng and Kŭmgang-san, other special economic areas have been established at Sinŭiju
Sinuiju Special Administrative Region
Sinŭiju Special Administrative Region was a proposed special administrative region of North Korea, on the border with China. It was established in September 2002 in an area including parts of Sinŭiju and the surrounding area, in an attempt to introduce market economics, and is directly governed as...
in the northwest (on the border with China), and at Rasŏn in the northeast (on the border with China and Russia).
International sanctions
International sanctions
International sanctions are actions taken by countries against others for political reasons, either unilaterally or multilaterally.There are several types of sanctions....
have impeded international trade to some degree, many related to North Korea's development of weapons of mass destruction
North Korea and weapons of mass destruction
North Korea has declared that it has nuclear weapons and is believed by many to have nuclear weapons. The CIA assesses that North Korea also has a substantial arsenal of chemical weapons...
. President Obama approved a new executive order in April 2011 that declares “the importation into the United States, directly or indirectly, of any goods, services, or technology from North Korea is prohibited.” Operational sanctions include:
- United Nations Security Council Resolution 1695United Nations Security Council Resolution 1695United Nations Security Council Resolution 1695, adopted unanimously on July 15, 2006, after recalling resolutions 825 and 1540 concerning North Korea and the non-proliferation of weapons of mass destruction respectively, the Council banned the selling of material that would further the ability...
- United Nations Security Council Resolution 1718United Nations Security Council Resolution 1718United Nations Security Council Resolution 1718 was adopted unanimously by the United Nations Security Council on October 14, 2006. The resolution, passed under Chapter VII, Article 41, of the UN Charter, imposes a series of economic and commercial sanctions on the Democratic People's Republic of...
- United Nations Security Council Resolution 1874United Nations Security Council Resolution 1874United Nations Security Council Resolution 1874 was adopted unanimously by the United Nations Security Council on 12 June 2009. The resolution, passed under Chapter VII, Article 41, of the UN Charter, imposes further economic and commercial sanctions on the Democratic People's Republic of Korea ...
- United Nations Security Council Resolution 1928United Nations Security Council Resolution 1928United Nations Security Council Resolution 1928, adopted unanimously on June 7, 2010, after recalling resolutions 825 , 1540 , 1695 , 1718 , 1874 and 1887 on the topics of North Korea and nuclear weapons, the Council extended the mandate of a panel of experts monitoring sanctions against the...
The Taep'oong International Investment Group of Korea
Taep'oong International Investment Group of Korea
The Taep'oong International Investment Group of Korea is a Pyongyang-based North Korean company established by the National Defence Commission of North Korea. It officially manages the oversea investments to North Korea...
is the official company that manages oversea investments to North Korea.
North-South economic ties
North and South Korea's economic ties have fluctuated greatly over the past 30 years or so. In the late 1990s and most of the 2000s, North-South relations warmed under the Sunshine PolicySunshine policy
The Sunshine Policy was the foreign policy of South Korea towards North Korea until Lee Myung-bak's election to presidency in 2008. Since its articulation in 1998 by South Korean President Kim Dae Jung, the policy resulted in greater political contact between the two nations and some historical...
of President Kim Dae Jung
Kim Dae Jung
Kim Dae-jung was President of South Korea from 1998 to 2003, and the 2000 Nobel Peace Prize recipient. He came to be called the "Nelson Mandela of Asia" for his long-standing opposition to authoritarian rule.-Early life:...
. Many firms have agreed to invest in North Korea, encouraged by the South Korean government's commitment to cover their losses, should investment projects in the north fail to become profitable.
Following a 1988 decision by the South Korean Government to allow trade with the North (see Reunification efforts since 1971), South Korean firms began to import North Korean goods. Direct trade with the South began in the fall of 1990 after the unprecedented September 1990 meeting of the two Korean Prime Minister
Prime minister
A prime minister is the most senior minister of cabinet in the executive branch of government in a parliamentary system. In many systems, the prime minister selects and may dismiss other members of the cabinet, and allocates posts to members within the government. In most systems, the prime...
s. Trade between the countries increased from $18.8 million in 1989 to $333.4 million in 1999, much of it processing or assembly work undertaken in the North.
During this decade, the chairman of the South Korean company Daewoo
Daewoo
Daewoo or the Daewoo Group was a major South Korean chaebol . It was founded on 22 March 1967 as Daewoo Industrial and was dismantled by the Korean government in 1999...
visited North Korea and reached agreement on building a light industrial complex at Namp'o
Nampo
Namp'o is a city and seaport in South P'yŏngan Province, North Korea. It was a provincial-level Directly Governed City from 1980 to 2004, when it was designated a "Special City" and made a part of South P'yŏngan...
. In other negotiations, Hyundai Asan
Hyundai Asan
Hyundai Asan is an arm of the South Korean conglomerate Hyundai Group and a major investor in North Korea. The company manages a number of projects, including the Kumgang-san tourist resort and road/rail building operations...
obtained permission to bring tour groups by sea to Kŭmgang-san on the North Korea's southeast coast (see Kŭmgang-san Tourist Region), and more recently to construct the 800 acres (3.2 km²) Kaesŏng Industrial Park, near the Demilitarized Zone
Korean Demilitarized Zone
The Korean Demilitarized Zone is a strip of land running across the Korean Peninsula that serves as a buffer zone between North and South Korea. The DMZ cuts the Korean Peninsula roughly in half, crossing the 38th parallel on an angle, with the west end of the DMZ lying south of the parallel and...
(DMZ), at a cost of more than $1 billion.
In response to the summit between Kim Jong-il
Kim Jong-il
Kim Jong-il, also written as Kim Jong Il, birth name Yuri Irsenovich Kim born 16 February 1941 or 16 February 1942 , is the Supreme Leader of the Democratic People's Republic of Korea...
and Kim Dae-jung in 2000, North and South Korea agreed in August 2000 to reconnect the section of the Seoul
Seoul
Seoul , officially the Seoul Special City, is the capital and largest metropolis of South Korea. A megacity with a population of over 10 million, it is the largest city proper in the OECD developed world...
-P'yŏngyang
Pyongyang
Pyongyang is the capital of the Democratic People's Republic of Korea, commonly known as North Korea, and the largest city in the country. Pyongyang is located on the Taedong River and, according to preliminary results from the 2008 population census, has a population of 3,255,388. The city was...
Gyeongui Railway Line
Gyeongui Line
The Gyeongui Line is one of the oldest railway lines in Korea. When opened in 1906 it linked Seoul in what is now South Korea to P'yŏngyang and Sinŭiju in what is now North Korea...
across the DMZ. In addition, the two governments said they would build a four-lane highway bypassing the truce village at P'anmunjŏm
Panmunjeom
Panmunjom, located in Gyeonggi Province, is a village on the de facto border between North and South Korea, where the 1953 Korean Armistice Agreement that ended the Korean War was signed. The building where the armistice was signed still stands, though it is on the northern side of the Military...
. Once these projects are complete, the Kaesŏng industrial park will have ready access to South Korean markets and ports.
TV commercials for Samsung’s
Samsung
The Samsung Group is a South Korean multinational conglomerate corporation headquartered in Samsung Town, Seoul, South Korea...
Anycall
Anycall
Anycall is a South Korean mobile phone brand established by Samsung Electronics in 1993. Like other mobile phone brands in South Korea, they provide technology such as cameras, internet access, and digital TV through Digital Multimedia Broadcasting.Samsung mobile phones are sold through the...
cell phone featuring North Korean dancer Cho Myong-ae and South Korea’s Lee Hyo-ri were first broadcast on June 11, 2006.
Some trade was cut off after the ROKS Cheonan sinking
ROKS Cheonan sinking
The ROKS Cheonan sinking occurred on 26 March 2010, when the Cheonan, a South Korean Navy ship carrying 104 personnel, sank off the country's west coast near Baengnyeong Island in the Yellow Sea, killing 46 seamen...
, for which South Korea blamed North Korea.
Joint ventures
Some South Korean companies have launched joint ventures in areas like animation and computer software. And Chinese traders do a booming business back and forth across the China–North Korea border. In a 2007 survey of 250 Chinese operations in North Korea, a majority reported paying bribes. Robert Suter, who heads the Seoul office of Swiss power generation company ABB Ltd., says his firm is staking out a position in North Korea, “It is the same as it was in China years ago. You had to be there and you had to build trust.” A number of South Korean enterprises are mainly active in a specially developed industrial zone in Kaesong Industrial RegionKaesong Industrial Region
Kaesŏng Industrial Region is a special administrative industrial region of North Korea. It was formed in 2002 from part of Kaesŏng Directly Governed City.-Kaesŏng Industrial Park:...
and Chinese enterprises are known to be involved in a variety of activities in trade and manufacturing in North Korea. European enterprises founded in 2005 the European Business Association (EBA), Pyongyang, a de facto chamber of commerce
Chamber of commerce
A chamber of commerce is a form of business network, e.g., a local organization of businesses whose goal is to further the interests of businesses. Business owners in towns and cities form these local societies to advocate on behalf of the business community...
representing a number of European-invested joint ventures and other businesses. Ch'ongryŏn, the pro-DPRK General Association of Korean Residents in Japan, broadcast on their TV in 2008 a TV film in 3 parts featuring foreign investment and business in North Korea. This film was put on YouTube on a channel called "BusinessNK" and can be watched together with a number of other videos on foreign joint ventures as well as other investment and business activities in North Korea.
Though no international banks now operate in the isolated socialist state, foreign companies are increasingly interested in dealing with North Korea.
The flat LCD television factory in North Korea is funded by the Ch'ongryŏn.
North Korea approved to open branches of Coca Cola and KFC in North Korea.
External links
- International Trade Office of Korea Full of information on investments in North Korea.
- North Korean Economy Watch
- World Hunger - Korea (DPR), World Food ProgrammeWorld Food ProgrammeThe World Food Programme is the food aid branch of the United Nations, and the world's largest humanitarian organization addressing hunger worldwide. WFP provides food, on average, to 90 million people per year, 58 million of whom are children...
- Despite U.S. Attempts, N. Korea Anything but Isolated, Washington Post, May 12, 2005
- On North Korea's streets, pink and tangerine buses, Christian Science Monitor, June 2, 2005
- North Korea on the rebound, Global Beat Syndicate, June 27, 2005
- North Korea - Economy at the CIA World Fact Book.
- Korea Society Podcast: North Korea: Market Opportunity, Poverty and the Provinces