Under Japanese rule, northern Korea was regarded mainly as a supplier of war materials, while manufacturing and processing branches were neglected. The Communist regime, however, emphasized the development of manufacturing. By 1963, the metal-fabricating, textile, and food-processing industries accounted for 33%, 18.6%, and 13.7% of industrial output, respectively. By the late 1980s, heavy industry (including metal fabricating and textile production) accounted for 50% of total industrial production. Private enterprise in industry declined from 27.6% of total output in 1946 to only 2% in 1956, and the private sector was said to have disappeared by 1959. About 90% of all industry is state-owned, and 10% is owned by cooperatives.
Under the Second Seven-Year Plan (1978–84), industrial output was scheduled to grow at an average annual rate of 12.2%; however, Western estimates put annual growth at 2% or 3% by the early 1980s. In the mid-1980s, the government became involved in clandestine missile production and supply. The DPRK had obtained the technology for producing HY-2 Silkworm and Scud (short-range) missiles in the 1970s and early 1980s. In 1985 the DPRK reached a bilateral accord with Iran, then in the midst of its war with Iraq, whereby North Korea would supply production technology and missiles in exchange for payments to finance engineering of the Scud-B missiles (a more accurate version of the original Scuds) and help in covert procurement of other necessary technologies. Ironically, because it became a matter of international security concern, the missile program is better documented that other aspects of the DPRK's secretive economy.
In 1987, Scud-B production facilities were established near P'yongyang. In June 1987, North Korea delivered 90 to 100 Scud-B missiles, 12 launchers, and an undetermined number of HY-2 Silkworm missiles to Iran as part of the two countries' $500 million military assistance agreement. In the meantime, the DPRK had established its own Scud-B regiment and begun work on an upgraded model, the Scud-C, with double the range (595 km/372 mi). Iran was being supplied "knock-down kits" for assembly at its ballistic missile plant in Isfahan. Iran continued in exchange to finance the DPRK's weapons program as it began work on an intermediate-range ballistic missile (IRBM) at Nodong that would give it its name.
In June 1990, the DPRK conducted the first successful test of the Scud-C, and in November concluded a second series of agreements with Iran believed to have covered the purchase of DPRK Scud-Cs and the conversion of an Iranian missile-maintenance facility into a production facility. In December 1990, during the run-up to the Gulf War, the DPRK also agreed to sell Scud-B and Scud-C missiles to Iraq, but in February 1991, despite a personal visit from Iraq's deputy foreign minister, the DPRK backed out of the deal because of Iraq's inability to pay cash. Syria, having received $2 billion for participating on the side of the coalition, used some of it to purchase more than 150 North Korean Scud-C missiles for an estimated $500 million. In March 1991, in a third agreement with Iran, the DPRK signed a five-year contract for the supply of 20,000 barrels of oil per day.
Pakistan, which North Korea had been supplying with conventional arms since the war over East Pakistan in 1971, helped with the secret deliveries of Scud-Cs to Iran. During the two tenures of Pakistani prime minister Benazir Bhutto (1988–90 and 1993–96), the cooperation with the DRPK was extended to include the training of Pakistani scientists and engineers in North Korea, the training of North Korean scientists and engineers at the Pakistan uranium enrichment plant at Kahuta, and the supply of Nodong missiles to Pakistan.
On 27 March 1992 the United States announced the imposition of sanctions on the DPRK and Iran for missile technology proliferation. In the mid-1990s, the DPRK recruited an estimated 160 Russian strategic weapons specialists to help with the DPRK's missile and nuclear programs. On 12 March 1993 North Korea announced its withdrawal from the Nuclear Nonproliferation Treaty (NPT) because of the International Atomic Energy Association's (IAEA's) efforts to conduct a special inspection of its nuclear facilities. During the spring of 1993, the successful launch of four missiles, one of which hit a target at 500 km (300 mi), raised international alarm to a new level. All the while, the DPRK representative to the UN denied that the government had ever supplied missiles to Iran.
In August 1993 a defector reported that two additional long-range missile bases had been built in DPRK, one at Chunggang and the other at Wonsan. In a report issued in 1996, the South Korean Unification Ministry estimated that arms exports constituted about 30% of DPRK exports 1980 to 1993, that annual Scud missile sales totaled about $500 million, and that the PDRK had a production capacity of about 100 Scud-B and Scud-C missiles a year.
The consequence of DPRK's role as arms supplier to the Middle East was increasing isolation elsewhere. Japan banned the export of missile-related technology to the DPRK in 1988. In 1991 when the Soviet Union collapsed, North Korea lost its main source of fuel and fertilizer, as well as its main markets. As a result, the DPRK's nonmilitary industries atrophied while the government continued to build its military industry, developing nuclear ambitions.
At the end of its Third Seven-Year Plan the government, admitting for the first time that targets had not been met, announced another three-year period of adjustment including a promised attention to light industry, as well as agriculture and foreign trade. In March 1994, however, it was confirmed that the government was building two new medium-range missiles—the Taepodong-I with a range of more than 1,600 km (1,000 mi) and the Taepodong-II with a range of more than 3,200 km (2,000 mi).
Manufacturing output had fallen an estimated 17.8% in 1992 and continued to fall by 1.9% in 1993, 3.8% in 1994, and 5.3% in 1995. In 1995, manufacturing accounted for an estimated 26.9% of GDP, of which heavy industry accounted for 20.5% and light industry 6.4%.
Only rough production estimates are available for a few key industries. These include the iron and steel manufactures, which reportedly amounted to 6.6 million tons of pig and conversion pig iron and 8.1 million tons of steel (including rolled steel) in 1995. Major iron and steel works are located at Ch'ongjin, Kimch'aek, Kangso, Namp'o, and Kaesong. Industrial plants produce sophisticated machinery, including generators, bulldozers, high-speed engines, and diesel locomotives. Other plants produce cement (17 million tons in 1995), refined lead (80,000 tons), and zinc (200,000 tons), metal cutting lathes, tractors, and trucks. The chemical industry produced an estimated 1.2 million tons of chemical fertilizers and 56,000 tons of synthetic fibers in 1994. The petrochemical industry is centered in the Hungnam area. Oil refining capacity was recorded at approximately 71,000 barrels per day in 2000. Textiles production increased rapidly in the 1970s; North Korea also produces clothing, jackets, and shoes.
After a series of negotiations in 1994, the so-called Agreed Framework was signed in October. It was essentially an attempt to use economic incentives to induce the DPRK to give up its nuclear weapons ambitions. In exchange for a freeze on its graphite-moderated reactors, the United States undertook to arrange for the provision of a 2000 MW Light Water Reactor (LWR). In the contract concluded in 1996 with the Korea Electric Power Company (KEPCO), DPRK was to acquire two 1000 MW LWRs. The Korea Peninsula Energy Development Organization (KEDO) was established to carry out the arrangements. Ground was broken for the construction of the LWRs in August 1997. While the DPRK's nuclear program apparently remained frozen, the government continued to develop its delivery systems and to export weapons and weapons technology.
In April 1998 the US government reported that Korea had helped develop Pakistan's 1,500-km (940-mi) Ghauri intermediate-range ballistic missile. Exports of Scuds continued to Iran, Syria, Pakistan, Egypt, and Libya. On 15 September 1998, DPRK successfully launched its first artificial satellite into orbit using a multistage rocket. In February 1999, US CIA director George Tenet warned that the DPRK was developing a new generation of missiles capable of delivering payloads to the United States. In March 1999, the ROK reported that the DPRK had as many as eight missile factories and twelve missile bases, with production capacity of about 100 Scud-like missiles a year. In mid-July, intense pressure from the United States, the ROK, and Japan dissuaded the DPRK from test-launching a Taepodong-2 missile believed to have a range of 3,800 km (2,400 mi). In September 1999, the US and DPRK reached an agreement on a moratorium on additional long-range missile testing, but an agreement on a wider freeze on its indigenous missile program and its weapons exports was not completed as of early 2003.