The economics of state failure in North Korea

Article Highlights

  • The particulars of #NorthKorea’s "extreme" security policies and practices are well known. They include:

    Tweet This

  • #NorthKorea’s provocative and extraordinarily militarized external policies have alarmed all its neighbors.

    Tweet This

  • #NorthKorea's conspicuous economic failure must be explained in terms "socialism with Korean characteristics"

    Tweet This

Ever since its founding in 1948, the Democratic People's Republic of Korea (DPRK, aka North Korea) has maintained an aggressive and bellicose international security posture. Today, fully two decades after the end of the Cold War, North Korea's external defense and security policies look arguably more extreme and anomalous than ever-in the sense of being more distant from evolving international security norms than ever before.

The particulars of DPRK "extreme" security policies and practices are well known. They include:

A hyper-militarization of society, economy, and policy. This reality is reflected in the regime's current top political slogan, "military-first politics" [songun chongchi]. But the astonishingly high priority that the defense sector now enjoys is nothing new. Although reliable statistics on the modern DPRK are indeed scant, there are strong indication that the DPRK has been running its society and economy on something like a full war footing since the early 1970s-or perhaps even earlier.1 Pyongyang's own data seem to suggest the government was fielding a military force of over 1.2 million in the late 1980s-proportionately, a mobilization level parallel to that of the United States in 1943.2

Maintenance and augmentation of chemical and biological weaponry capabilities. At a time when almost all of the world's government have renounced biological and chemical warfare-and when most of the governments with bio-chem warfighting capabilities have dramatically reduced or entirely eliminated those arsenals-Pyongyang appears to be adding to its stockpiles, and perfecting its bio-chem delivery systems.

Ballistic missile development. Despite its dire economic straits since the end of the Cold War, North Korea has been deeply committed to developing and improving its ballistic missile program. Its launch of the Taepo Dong in August 1998 signified that North Korea was one of only six states with demonstrated multi-stage ballistic missile capabilities. Research and development on the long-range missile program continues robustly: indeed, just last month Pyongyang test-fired its latest long-range Unha-3 [known abroad as TaepoDong 3], ornamented with a "weather satellite" of roughly the same size and weight as a nuclear warhead, to commemorate Kim Il Sung's 100th birthday.

Relentless overt and covert nuclear weapon development programs. Pyongyang's persistent drive to acquire the means of producing nuclear weaponry, irrespective of treaty obligations or other promises is, of course, the matter at the heart of the ongoing North Korean nuclear drama. Having withdrawn from the Nuclear Nonproliferation Treaty (the only state ever to do so), the DPRK is apparently pressing forward with plutonium reprocessing for what it terms a "war deterrent." It is also evidently pushing forward with its now-notorious "second-track" highly-enriched uranium (HEU) program for producing weapons-grade nuclear materials. It has already tested atomic weapons twice and by all indications is on track to continue to doing so until it solves the problem of successful nuclear weapons design, irrespective of the reaction of the international community.

Confrontational international diplomacy. Pyongyang adopts an almost singularly vicious language of threats in its dealings with its neighbors and their allies. Pyongyang's diplomats first warned of turning Seoul into "a sea of fire" in 1994-but the warning has subsequently been repeated on numerous occasions, most recently last month, when the North Korean military threatened to "reduce all the rat-like groups" in the Seoul government "to ashes in three or four minutes... by unprecedented peculiar means and methods of our own style."3 Japan has likewise been officially served notice of North Koreans' "determination to settle accounts with Japan, their sworn enemy, at the cost of their [i.e. Japan's] blood."4 And, since 1998, Washington has repeatedly heard variations on the following theme:

"[S]urgical operation"-style attack and "preemptive strike" are by no means an exclusive option of the United States, the mode of strike is not a monopoly of the U.S., either. It must be clearly known that there is no limit to the strike of our People's Army and that on this planet there is no room for escaping the strike.5

Continuing unconditional stance on unification with South Korea. Unlike the example of China's unification policy-where a "one country/two systems" formula is still represented in the stark differences between political and economic rules in Hong Kong and on the Mainland-the North Korean government shows no indication that it would ever accept anything less than a complete absorption of South Korea under Kim family rule and DPRK-style socialism. The North Korean official press and "unofficial" media continue to imply, or sometimes to insist, that the ROK government-notwithstanding the popular election of a two "Sunshine Policy" Presidents, Kim Dae Jung and Roh Mu Hyun-is an illegitimate colonial police state that must be thoroughly extirpated so that the suppressed population of the South can join under the government in the North that it adores. North Korea's positions are reflected in the statements of the imaginary "resistance fighters" from South Korea whose words are episodically broadcast from Pyongyang (such as this one during the Presidency of progressive Roh Mu Hyun in the year 2005):

"...the six decades of the U.S. forces' occupation of south Korea have been crime-woven years in which they have encroached upon the sovereignty and dignity of Korea and barred the development and reunification of the Korean nation... The U.S. is tightening its military occupation and rule over south Korea... The Koreans set this year as the year of the withdrawal of the U.S. forces... from South Korea in accordance with the idea of "By our nation itself."6

The DPRK's provocative and extraordinarily militarized external policies have alarmed all its neighbors. Yet, while "exporting" strategic insecurity, these have also apparently "imported" economic failure. The DPRK economy, alone among the economies of East Asia, has suffered prolonged and severe economic failure since the end of the Cold War.

The DPRK's descent

The most vivid sign of that failure, of course, was the North Korean famine of the 1990s-the only-ever famine to be visited upon a literate urbanized population in peacetime.7 The true death toll from that man-made disaster is of course still unknown; Pyongyang has refused to divulge the death count, even though it has continued to accept hundreds of millions of dollars in outside "humanitarian assistance" to mitigate the reportedly continuing danger of mass hunger. By these indications, North Korea would be the only industrialized economy in human history to have lost the ability to feed itself.

North Korea's miserable economic performance can be described a little more specifically by the metric of commercial exports (one of the few economic indicators for the DPRK that can be discussed with even relative confidence, owing to "mirror statistics" on the DPRK's international sales and purchases reported by the country's trading partners8). Between 1990 and 2010, reported world exports of merchandise nearly tripled in real terms-but by World Bank estimates, real DPRK commercial merchandise exports in 2010 would have been just slightly higher than 20 years earlier.9 Things would look even worse if we tried to estimate per capita export trends for this period: whereas the average for the rest of the world was a real per capita export jump of about 125% (despite the ongoing global economic crisis), real per capita DPRK exports would actually look to be lower-perhaps 10-12 percent lower in 2010 than 20 years earlier. This despite a decade and more of politically determined and governmentally subsidized trade support, first from South Korea, and now from China as well. Suffice it to say, then, that North Korea's confrontational external posture has been coincident with a regimen of decreasing economic self-sufficiency-a declining ability to finance state operations and state survival as "normal nations" do.

Whither the North Korean economy?

North Korea's conspicuous economic failure must be explained not in the failings of the Korean population, or even in terms of the generic economic shortcomings of command socialism, but instead in terms of the particularities of "socialism with Korean characteristics" as it evolved in the DPRK over the past generation-what North Korean officialdom terms "our own style of socialism" [urisik sahoejuui].

What are the particular factors that have contributed to modern North Korea's disastrous economic record? There are several.

1) A breakdown of the DPRK statistical system. Since the early 1970s, there have been continuing signs that the DPRK statistical apparatus was becoming increasingly incapable of transmitting accurate and comprehensive information to the country's decision-makers-a critical danger for any centrally-planned system.10

2) A breakdown of the DPRK central planning apparatus. The North Korean economic planning system remains opaque to outsiders, but there are indications that the process has become increasingly compartmentalized, irregular and ad hoc since the early 1970s-and that it may have ceased to function in a systematic, long-range manner altogether after the end of the last announced plan (1993).

3) A hyper-militarization of the national economy. If North Korea is operating on something like a total-war footing, it is allocating an enormous share of its resources to the defense sector and the allied defense industries. Under such circumstances, there is likely to be an extraordinary and continuing drain of potentially productive resources into activities that produce little or no economic "value added." A total-war footing may have limited long-term economic consequences if the mobilization is for relatively short period periods of time11, but North Korea's hyper-militarization has been in progress for over three decades.

4) A relentless war against the consumer sector. All Soviet-type economies have unnaturally small consumer sectors, but North Korea's tiny consumer sector is strangely compressed even by the standards of Stalinist planning. (Even before the hyper-militarization of the 1970s, the estimated share of the consumer sector within the DPRK economy was much lower than for counterpart economies within the Soviet bloc.12) Extreme suppression of the consumer sector inhibits productivity and growth by reducing the consumption of goods and services that may contribute to "human capital" and by eliminating the sort of "inducement goods" whose attractiveness would otherwise be motivating workers to earn and save money.

5) Demonetization of the national economy. Complex modern economies cannot function efficiently on a barter basis. Nevertheless, money has played an amazingly limited role in the DPRK's economic activities over the past generation. In the late 1980s, the DPRK's wage bill apparently amounted to only a third of its "net material product"-and therefore, to far less than a third of its GNP.13 Even for a Communist economy, this was a remarkably low ratio, and that ratio presumably declined still further over the 1990s. With the passage of new economic measures in July 2002, Pyongyang has effectively re-introduced money into its consumer sector-a welcome event-but that sector accounted for only a small share of the overall national economy. And, in its confiscatory November 2009 "financial reforms," however, Pyongyang's attempts to demonetize of the consumer economy resumed once again.

6) Lack of financial intermediation. As has by now been well-established in the economics literature, financial intermediation (banking, credit markets, etc.) plays a direct and positive role in the growth and development of national economies. North Korea has virtually no officially-approved mechanisms for such intermediation in its domestic economy.

7) Defiant nonpayment of international debts. The DPRK has been in virtual default on its Western loans since the mid-1970s. Although many other debtor governments from low-income areas have experienced performance problems on their loans over the past generation, Pyongyang has adopted an almost uniquely pugnacious and hostile posture of non-repayment toward its creditors. Consequently, the DPRK's international credit rating is approximately zero.

8) Allergy to trade with "imperialist" countries. Despite the huge and steadily expanding opportunities to earn export revenues from the import markets of the world's most advanced economies, North Korea has made conspicuously little headway-or effort-to penetrate these lucrative markets. One may argue that sanctions and other political obstacles discourage North Korean exports to the USA and her treaty allies in Northeast Asia, Japan and South Korea. But exports to the other advanced Western OECD economies were almost 50 percent lower in 2007 than they had been in back in 1980 in current terms. Adjusting for inflation, the DPRK's real exports to this grouping would have collapsed by over 70 percent over this period.14 (Note further that 2007 was before the latest round of purportedly comprehensive UN economic sanctions against DPRK, encapsulated in UN Security Council Resolution 1874, was voted into existence in 2009.) This strikingly poor record of performance reflects the content of North Korea's trade policies-an approach largely informed by Pyongyang's continuing apprehension about what it terms "ideological and cultural infiltration."

9) Exceptionally inhospitable "institutional" landscape. Although Soviet-type economies are always characterized by a problematic "business climate," the North Korean setting is perhaps uniquely unfavorable for spontaneous economic activity or independent enterprise. Some of the factors worth mentioning here are: 1) pervasive restrictions against and penalties on private initiative for both individuals and enterprise (recent "reforms" notwithstanding); 2) highly opaque and unpredictable application of existing economic measures, regulations and laws toward DPRK citizens; 3) often severe extra-legal intervention in business activities of the domestic population; 4) unattractive economic legislation governing foreign enterprises; 5) lack of consistency between existing legislation and actual government decisions concerning foreign business activities; and 6) pervasive government opposition to the generation and/or repatriation of profits by foreign businesses.

When one considers this imposing array of economically wasteful (or positively destructive) policies and practices, the explanation for North Korea's prolonged and severe economic decline becomes clear enough. North Korea's political economy is the proximate explanation for the country's current, precarious economic straits-no additional external or internal factors need be adduced to explain this dismal record. 15

It is noteworthy that North Korea's trajectory of economic failure tracks very closely with the ascent of the late "Dear Leader," Kim Jong Il. In the early 1970s, before Kim Jong Il emerged on the DPRK political stage, North Korea's economy was widely thought to have been slightly ahead of South Korea's; by the time of Kim Jong Il's death, North Korea was subsisting on emergency humanitarian aid from abroad, while South Korea has ascended into the realm of the OECD, the affluent aid-giving Western democracies. Kim Jong Il will be remembered as the architect of North Korea's monumental economic failure, its catastrophic leap backward. What will the country's new leadership be remembered for? The answer is still unclear.

 

1 For an analysis of these data, see Nicholas Eberstadt, Policy and Economic Performance  during the Cold War Era: 1945-1991 (Washington: AEI Press, 2010).

2 Nicholas Eberstadt and Judith Banister, "Military Buildup in the DPRK: Some New Indications from North Korean Data", Asian Survey 31, no. 11 (November 1991), 1095-1115.

3 "KPA Supreme Commands Warns Lee Myung Bak Group of Quick Action," Korea Central News Agency (KCNA), April 23, 2012, http://www.kcna.co.jp/item/2012/201204/news23/20120423-26ee.html.

4 "Japan's Policy for ‘Sanctions' against DPRK Slammed," KCNA, July 4, 2009, http://www.kcna.co.jp/item/2009/200907/news04/20090704-06ee.html.

5 For example, see "KPA will Answer U.S. Aggression Forces' Challenge with Annihilating Blow," KCNA, December 2, 1998, http://www.kcna.co.jp.

6 "AINDF Pyongyang Mission Chief Interviewed," KCNA, September 9, 2005, http://www.kcna.co.jp/item/2005/200509/news09/09.htm#8.

7 See Stephan Haggard and Marcus Noland, Famine in North Korea: Markets, Aid and Reform, (New York: Columbia University Press, 2007).

8 "Mirror statistics" on trade, it should be noted, are by no means a perfect reflection of such commerce-even countries as similar and open as Canada and the USA come up with different totals for their merchandise and service trade. For DPRK, so heavily engaged in illicit commerce that partners have no wish to highlight, the problem is naturally magnified. And the problem of tracing trends over time for North Korea is further complicated by question of how to value trade with Communist countries in market economies' currency (current U.S. dollars being the conventional medium these days). Estimating constant rather than current dollar trends in North Korean international trade is a venture therefore especially subject to potential error. Although this paper does rush in to this area, where other economists might fear to tread, we note those numbers must be handled by the reader with the caution they deserve.

9 Data drawn from the World Bank's World Development Indicators Online, available electronically at http://data.worldbank.org/data-catalog/world-development-indicators .

10 Pyongyang's 1999 "Law on Socialist Economic Planning" can be seen as an implicit acknowledgement that the statistical apparatus necessary for centrally planning had effectively broken down. For details of earlier signs of trouble in the DPRK statistical system, see Eberstadt, Policy and Economic Performance in Divided Korea.

11 See, for example, Alan S. Milward, War, Economy, Society: 1939-1945, (Berkeley, CA: University of California Press, 1977).

12 Eberstadt, Policy and Economic Performance in Divided Korea.

13 Ibid.

14 See, for example, Nicholas Eberstadt, "Western Aid: The Missing Link for North Korean Economic Revival," American Enterprise Institute AEI Working Papers Series in Development Policy no. 6 ( April 2011), http://www.aei.org/files/2011/04/26/files/2011/04/26/Updated-Eberstadt-DPWorkingPaper-April2011.pdf  

15 For additional analysis and quantitative assessments regarding the failure of the North Korean economy, see the important work by Marcus Noland of the Institute for International Economics, especially Avoiding The Apocalypse: The Future of the Two Koreas (Washington, DC: IIE, 2000).  

 

 

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Nicholas
Eberstadt

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

Event Registration is Closed
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.