Political Consistency in the North’s Pendulum Swinging Economic Policy

The government of the Democratic People’s Republic of Korea (DPRK) is perhaps the last among its fraternal socialist allies to have maintained the orthodox socialist centrally planned economic system. Since the armistice in 1953 that ended the Korean War, the Kim Il-sung administration proclaimed Juche as the national ideology in 1955 and centralized the economy by 1958. After defaulting on foreign loans in the 1970s and experiencing brutal economic crises, it took 40 years for the North to legally allow partial decentralization of its Stalinist economy in 1998.[1]

The DPRK claims that its economic centralization was initiated by the North Korean Provisional People’s Committee in March 1946 accomplished by 1958, when the state completed its socialist reform of means of production (Korea Institution for National Unification 2009, 181). In 1946, 74.1% of the North’s total work force consisted of private farmers, but by December of 1958, the percentage of the private workforce of not only farmers, but also of private craftsmen, entrepreneurs, and merchants fell to 0% according to the DPRK central yearbook of 1961. Moreover, property rights fully belonged to the state, and the central planning mechanism determined the allocation of resources.

The Stalinist start of the North’s collectivized economy, galvanized by Kim Il-Sung’s organizing and motivating talents that he developed as a guerilla fighter, was adequate enough to outpace the South’s development for about the first two decades after the end of the Korean War.[2] Moreover, in 1945, compared to the agricultural South, the Northern half of the peninsula was in charge of 76% of the total mining production, 92% of electrical-generating capacity, and 80% of Korea’s heavy industry (Hassig and Oh 2009, 69). Joan Robinson, a well-known post-Keynesian economist who visited the DPRK in 1965 once said, “all the economic miracles of the world are put in the shade by these achievements” (1972, 208).

Although the DPRK government completely bypassed the economic miracle that the South had, both the South and the North had to reestablish their economies from the destruction caused by the Korean War. The North’s process was rapidly stimulated by the inflows of aid and materiel from its fraternal communist governments, and their support – mainly from the USSR and China – well lasted with sufficiency until the mid-1960s.[3] Yet, the Sino-Soviet split which started in the 1960s, and the economic crisis in China made the inflows less secure for the DPRK. Moreover, the ideological split between the communist states was the most decisive factor that allowed Kim Il-sung to justify his prioritization of the military industry over the civilian industry. Eventually, as the ‘dual track development of military and economy’ was formalized through the General Assembly of the Central Committee of the Worker’s Party of Korea in October 1966, a military-industrial complex started to appear in the North’s economy.

             Facing difficulties with receiving assistance from its fellow socialist nations since the mid-1960s, the North’s economy entered the path to becoming a complete autarky. Furthermore, the North’s national ideology of Juche (characteristically translated as national self-reliance) was dominant enough to prevent the North from joining the communist brethren of the Council for Mutual Economic Assistance (COMECON). Hence from the 1970s, the DPRK government took initiatives in establishing economic relations with capitalist states. However, the DPRK ended up being heavily in debt due to its efforts to import foreign capital goods, and defaulted on foreign loans by the late 1970s.

             The North’s financial crisis, however, did not hinder its efforts of importing foreign capital and technology. In 1984, North Korea passed its first Joint Venture Law, and Kim Il-sung paid his state visit to Moscow in the summer of the same year. The efforts brought Soviet subsidies and investments from pro-Pyongyang ethnic Koreans in Japan which accumulated to a modest amount of US$ 150 million (Eberstadt 2009). The Soviet’s political support and subsidies, of course, aborted after its collapse in 1991, and worsened the situations for the North to accomplish the ‘independent national economic construction’ that it dreamed of since the proclamation of “Juche for the economy” in 1956.

What hurt the Republic’s people most was that the North’s central distribution mechanism fell into a decline. Dating back from the 1960s, when Kim Il-sung initiated the state’s excessive emphasis on national defense, the North propelled the ‘heavy industries first development’ program, which rapidly shrank the manufacturing and agricultural industries. The Republic’s industries, hence, were polarized between the military industry and the civil industry. From early as the 1980s, the Republic suffered from shortage of people’s basic necessities (Institute for Unification Education 2012). In 1990, the government officially suppressed the people’s consumption with the “let’s eat two meals a day” campaign (Haggard and Noland 2011).

Indeed, external threats, such as the Bush’s “axis of evil” speech of 2002 were hostile enough for the DPRK to consider the needs of taking a conservative stance at the cost of keeping the military-industrial complex (Carlin and Wit 2006). However, Pyongyang’s internal political dynamics also reflected the DPRK’s such stance (Haggard and Noland 2011). After the death of Kim Il-sung in 1994, Kim Jong-il chose military as a key base of his political power and support from the existing political elites who were entirely of his father’s generation, and when he passed away in December 2011, Kim Jong-il’s official title was Chairman of the National Defense Commission. Moreover, as Kim Jong-il further consolidated his power with Songun or “military first” politics, the military gained the absolute first call on the country’s resources (Hassig and Oh 2009). After and even during the most disastrous famine in the 1990s, North Korean government further justified the Songun politics with the rationale that the economic development will be witnessed when the military industry grows further and starts spilling-over positive externalities in civilian industries (Institute for Unification Education 2012).

After the collapse of the USSR in 1991, however, the North’s military and civilian industries went into a decline and the North’s economy entered a path of deterioration, which eventually brought about in the 1990s the “only-ever famine to be visited upon a literate urbanized population in peacetime” (Eberstadt 2006, 247). Killing about 600,000 to 1 million people in the so-called arduous march period of 1994 and 1998, the famine became a “national trauma” (Haggard and Noland 2011, 6). The deterioration of the central planning system led to expansions of the North’s unregulated market activities, and eventually became one of the pillars that sustain the economy of the DPRK to this day.

In response to the economic crisis, the Republic has partially allowed decentralization since 1998. In July 1st of 2002, the DPRK initiated the July 1 Economic Management Improvement Measure that functionally decriminalized market activities and allowed South Korean investment in Kaesong and Mt. Kumgang. However, the Measure caused a hyperinflation of the overall price level by roughly 1000 percent (Haggard and Noland 2011, 9). Therefore, the July 1 Measure could not bring about the “partial allowing of market activities under the centrally planned economy”, and left cracks in the Kim regime’s credibility with regards to its economic policies.

The North’s and its foreign watchers’ high hopes have waned as the policymakers in Pyongyang appointed Park Nam-ki as the economic policy director in order to reinstate the public distribution system and ban private grain trading in 2005. Also, in 2009 the state initiated a confiscatory currency reform to revive orthodox centrally planned economy and abolish market activities. Yet, chaotic “civil disobedience and sporadic protests” ultimately led the state to abandon the “reform in reverse” and announced a new party directive that reopened retail markets, allowed citizens to hold foreign exchange, and firms engaged in cross-border trade to operate more freely (Haggard and Noland 2011).

The DPRK government has never fully engaged a reform policy, and even recentralized the economy when there were signs of weakening in the Kim regime. Within the boundaries of the “socialism of our own style” (urisik sahoejuui) the Republic’s economic policies have swung inch-by-inch between decentralization and recentralization. Thus, the DPRK’s own style of socialism may have experienced some pendulum swings of its economic policies, but little or almost none of the political basis on the economy has been modified. Based on the idea of self-sufficiency (jaryukgaengseng) and the national ideology of Juche, North Korean economic policies have maintained the three major stances of ‘independent national economic construction’, ‘heavy industries first development’, and ‘dual track development of military and economy’. After the collapse of the USSR, North Korea’s miserable economic performances were threatening enough to bring some changes to its stances, yet the adjustments were made accordingly to the Kim-family administration’s survival strategy of military-first (songun) politics. Based on what has been observed outwardly, the North has arguably shown a political consistency in its economic policies at any given period of time in the Republic’s economic history.

[1] The government made constitutional amendments to partially extend property ownership limits of individuals and social cooperative groups.

[2] The conventional wisdom and econometric evidence suggest that the centrally planned economies (CPEs) show faster industrialization than average performance in the initial stages, but fall below the average performance when allocated inefficiencies become ever more costly (Noland 2000, 60).

[3] Eberstadt claims that the USSR, China and the countries of Council for Mutual Economic Assistance Europe provided free machinery equipment, and even entire industrial enterprises (2009, 65).


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