Current North Korean Economy: Overview and Prospects for Change

Abstract

IntroductionThe North Korea of the 1990s was associated with stark images of economic disruption and famine. Although economic distress and famine have subsided since 1998, North Korean food shortages and industrial recession have persisted to the present. Battered by a nearly bankrupted economy and continuous shortages of capital, energy and food, North Korea ("the North") has recently been opening its doors to strike political and economic deals.North Korea's economy has resulted in low industrial productivity and efficiency, technological backwardness, and, in the end, economic stagnation. The North Korean economy withered to the point that almost all of its sectors no longer functioned properly. Confronted with economic difficulties and no options for rehabilitating the economy without international help, the North undertook drastic measures for reforming its economy. The move has been toward a market economy with a price mechanism aimed at fostering industrialization, deviating from its traditional planned economy. Rudimentary market economics have gradually been introduced to the North's centralized economic system and its functions.Economic System and Its DysfunctionThe North possessed a unique type of command economy based on a system of self-reliance, Juche. The North's economy was characterized by state ownership of means of production and centralized economic planning and command, and emphasized military development. The North's economy got into trouble as it grew more complex, having difficulties in controlling the many intertwined variables of the economic system in the absence of a market mechanism for allocating resources and distribution. The centrally planned system lacked entrepreneurship, and the North's central planning did not allow the profit motive and did not reward innovation and enterprise.The prices of goods and services were derived from labor costs, not through the pricing mechanism of supply-and-demand interactions. The North's commercial management system was made up of wholesale commerce, which was controlled by the central government, and retail commerce, which was controlled by the regional governments. The government was therefore the North's sole source for the production and distribution of goods.1As a result, there was no private gain incentive to managers or workers for improving product quality or developing more efficient production techniques. Enterprise managers and workers actually resisted government-imposed innovations because higher and sometimes-unrealistic production targets usually accompanied them. Innovation also lagged because of a lack of competition. Entrepreneurs were essentially government-owned monopolies, and the North's innovation was often resisted. There were no new startup firms, driven by the profit motive, to introduce better products, superior managerial techniques, or more efficient production methods.Over an extended period, enterprises produced the same products with the same techniques, even as both the products and techniques became increasingly obsolete by world standards. The individual worker lacked motivation to work hard because there were few material incentives. Because of the low priority assigned to consumer goods in the production plans, only a limited array of inferior goods and services was available to consumers. The North's economic self-sufficiency also isolated its enterprise from import competition. The North kept recording minus growth or economic stagnation in most of the 1990s, and with all the efforts and measures on its part there were hardly any signs of economic recovery, as shown in Table 2.Changing Economic Situation and Reform MeasuresThe North's workers found it increasingly difficult to make ends meet on their wages, which companies were often not able to pay regularly due to frequent suspension of operations because of power shortages and a lack of basic raw materials and intermediate products. …