products, vessel equipment, nonmetallic minerals, clothes, essential oil, processed jewels).
Although diversification tends to be wasteful, companies added business lines partly as a measure to diversify risks in economically uncertain times “due to hostile foreign forces,” according to the government. The diversification also forced businesses into tougher competition with each other, a move that was seen as a countermeasure against waste, as Mr. Ham, a senior official of the State Planning Committee, explained to me. In short, the state didn’t want to have all its eggs in one basket in case a crisis erupted.
With the support of the Korean residents living in Japan since the time of the Japanese colonization, Kim Il Sung founded the country’s largest conglomerate, the Korea Daesong Trading Group. Today it continues to operate under party provision. Daesong was to become a model group for the rest of the North Korean companies, dabbling in a kaleidoscope of sectors like mining, light industrial factories, ginseng cultivation, shops, and even a large and well-managed ostrich farm, which I visited. Like the South Korean chaebol, Daesong also has its own bank that’s set up as a separate business unit but that helps finance its vast operations.
During the first few decades of its existence, the DPRK boasted significant development progress with fast electrification and mechanization. By 1984 the state had six to seven tractors per 100 hectares. It also saw widespread “chemicalization”—that is, more widely used fertilizers and pesticides in agriculture and land irrigation, which increased from 227,000 hectares in 1954 to 1.2 million hectares in 1988.1
As there were no economic incentives to flee to South Korea, defectors rarely ran off during that period. In fact, the opposite was more common. Among the South Koreans who defected to the North, Ri Sung Gi and Choe Deok Sin were the most famous. Ri, a chemist, ran away in 1950 and was later accused of being involved in North Korea’s nuclear weapons programs when he headed the North Korean Atomic Energy Research Institute. He also played a leading role in setting up the massive Vinalon Complex in Hamhung, producing a garment material that became a symbol of national pride and, as many scholars have argued, the material embodiment of Juche. The DPRK-produced Vinylon, also known as “Juche fiber,” that was produced there has become the national fiber of North Korea and has been used for the majority of textiles. It has outstripped the use of cotton and nylon. Choe was a South Korean foreign minister who defected in 1986 with his wife to North Korea.
Other prominent defectors were O Kil Nam, a South Korean economist who defected with his family in 1985 to Pyongyang and asked for political asylum in Denmark one year later. The final one was Ryu Mi Yong, current chairwoman of the North Korean Chondoist Chongu Party, who defected in 1985 with her husband to Pyongyang.
PATCHING UP THE ECONOMY
Things took a dramatic turn downward in the 1980s, when North Korea’s annual growth dropped substantially to a modest 3 percent per year on average. In the 1990s, the country suffered a further setback when its economy shrank by an annual average of about 4 percent. Most scholars attribute the collapse to the fall of the Soviet Union and Eastern European states, which previously offered food and fuel subsidies to the regime. Combine that with the huge natural calamities such as a drought in the 1990s and, last but not least, structural problems like its obsolete, underinvested state economy.
While global geopolitical changes in the 1980s kick-started China and Vietnam on the road to economic reform, North Korea took no such path. Three reasons explained why the DPRK was less willing to reform than China and Vietnam. First, the U.S. refused to sign a peace treaty with the DPRK, which made the country feel threatened and froze it in a militarized, defense-oriented state. Second, Vietnam was reunited under northern rule in 1975, while mainland China was also a single entity at relative peace (not counting Hong Kong, Macao, and Taiwan). Unlike North Korea, China and Vietnam did not face a significant external political threat, which allowed the two nations to open up gradually without fear of overthrow.
Chinese leaders like to remind their North Korean colleagues of this history. That’s because Beijing hopes to put North Korea on a Chinese growth model. At diplomatic meetings, they explain to North Koreans that the socialist countries in Eastern Europe collapsed because of their reluctance to reform, whereas Vietnam and China undertook pragmatic even if unpopular changes. The official line is that the reforms led them on a path to development, prosperity, and strength. In the eyes of the Vietnamese and Chinese neighbors, socialist countries like North Korea and Cuba needed to make up their minds quickly.
One analysis by Bank of America-Merrill Lynch, published in early 2012, argues that serious economic reforms would most likely trigger an annual growth rate of 10 to 12 percent—a remarkably high average that exceeds the roughly annual growth of 5 to 8 percent in China and Vietnam. The firm further noted that liberalization would close the income gap between “rich” South Korea and “poor” North Korea. In forty years North Korea may be just over three times poorer than its southern neighbor, compared to forty times poorer if no changes are enacted soon. The report added that the DPRK can achieve this goal if it follows the steps of other emerging economies that decided to join the global economy. It also said that market opening does not necessarily lead to reunification, as the North may opt for a partial open market system like China.
Western advice to the North Koreans is suspected as a sugar-coated plot to overthrow the socialist system, in particular during periods when tensions with the U.S. and South Korea are high. Still, in my own private discussions with senior cadres, they admitted the need to “learn from other countries and adopt elements from them that are beneficial for our country.”
Lately, reform-minded cadres have been getting a new boost from “Kim Jong Un, who has an interest in the knowledge economy and is carefully watching economic reforms in various countries, including China,” said Yang Hyong Sop, vice chairman of the Supreme People’s Assembly, to the Associated Press in a rare interview on January 16, 2012.
North Korea’s official economy began a modest recovery in the 2000s, but annual average growth was meager at 1.5 percent per year during the 2000s. As in countless other poor countries, the informal or “shadow” economy without a doubt grew multifold during the same period. In the absence of reliable statistics, the figures I’ve compiled from different sources, combined with my on-the-ground observations, are merely approximations and not precise data.
But being in the field, I’ve captured a general idea of economic trends that the statistics don’t fully reveal because the government doesn’t publish them. There are emerging bicycle repair spots across the country and more people selling cigarettes, drinks, food, and other goods along streets outside the capital.
But number-crunching didn’t encapsulate the breadth of what was going on. In February 2012, for instance, the South Korean Hyundai Research Institute reported that North Korea’s GDP grew the previous year by a surprising 4.7 percent from a year earlier. But take the figure with a grain of salt. It was based on the think tank’s calculations of grain production, which according to the U.N. Food and Agriculture Organization2 grew by 7.2 percent from the previous year. Combine that, the organization argued, with a lower infant mortality rate—a combination of trends that, from an economist’s standpoint, signify growing per capita income and prosperity. The country’s heightened efforts to meet its goal of building “a strong and prosperous nation by 2012” was another cause for this growth rate, although it will be unsustainable without future economic reforms. There were other chance factors, like a good harvest that year and the efforts made in preparation for Kim Il Sung’s birthday.
There appears to be no end in sight for the severe economic problems of the world’s most centrally planned economy. Chronic under-investment from both foreign investors and the government led to an industrial capital stock that was run down to a critical level. Over the past two decades, countless factories have closed; those that continue to run often do so at low-level capacities, thanks to a shortage of raw materials. (North Korea is relatively
