Korea, Democratic People's Republic of (DPRK) - Economy

The Korean War devastated much of the DPRK's economy, but growth after postwar reconstruction was rapid. The Communist regime used its rich mineral resources to promote industry, especially heavy industry. A generally accepted figure put annual industrial growth from 1956 to 1963 at about 25%. By 1965, industry accounted for 78% of the total output, and agriculture 22%, an exact reversal of their respective contributions in 1946. Until the oil crisis of the 1970s, the DPRK ranked as one of the most prosperous states in Asia, but the government's pursuit of self-reliance ( juche ) had, by the end of the 1960s, also transformed it into one the most isolated and strictly regulated economies in the world. After 1965, greater emphasis was placed on agriculture and light industry, the latter stress owing to increasing demands for consumer goods. The industrial growth rate slowed in the late 1960s to around 14% and averaged about 16% during the 1970s. In the meantime, the military government in South Korea—the Republic of Korea or ROK—starting in 1962, began a series of Five Year Plans that set it on the trajectory of export-led growth that would by 2001 produce a per capita income 19 times greater than that in the DPRK. Efforts in the DPRK to accelerate the growth rate during the mid-1970s, requiring substantial imports of heavy industrial equipment from Japan and Western Europe, led to a payments crisis, and the DPRK was repeatedly compelled to reschedule its foreign debt.

The seven-year plan for 1978–84 called for an annual increase in industrial output of 12%. Reliable data on the economy became increasingly difficult to obtain as Kim Il Sung's regime became more obsessed with passing power and his particular vision on to his son, Kim Jong Il. In the 1980s the government also became seriously involved in the clandestine supply of missiles and nuclear technology to Pakistan and Middle East countries, particularly Iran. Estimates are that growth fell to no more that 2% or 3% in the early 1980s as about one-fourth of output went into the country's outsized military.

After a three year "period of adjustment" the government announced its third Seven-Year Plan for 1987 to 1993, which targeted an annual increase in industrial growth of 10%. The plan also called increased allocations to agricultural production, fueling speculation that there were food shortages. In any case the plan period spanned three watershed events that helped set the economy on its downward course. First was the ROK's successful hosting of the 1988 Olympics, which left the DPRK increasingly isolated due to its own refusal to co-host any events and instead to boycott the games. Second was the break-up of the Soviet Union in 1991, cutting off the DPRK's main sources of trade and aid. Third was the admission of the ROK and the DPRK to the UN in 1991 as separate states, unblocked by a veto from either Russia or China. On 8 July 1994, Kim Il Sung died, throwing the society into mourning, but also, it was hoped, opening up opportunities for economic reform. In October 1994, the socalled Agreed-Framework was put together whereby a consortium of the United States, the ROK, and Japan, organized as the Korean Peninsula Energy Development Organization (KEDO), would undertake to provide for the finance and construction of light-water nuclear reactors (LWRs) to supply 2000 MW of power in 2003 plus an interim supply of 500,000 metric tons of fuel oil a year in exchange for the DPRK's freezing and eventually dismantling its heavy-water nuclear facilities that were readily convertible to weapons use.

In January 1995 the United States sent a first installment of 50,000 tons of fuel, but in 1995 and 1996 the North Korean population became victims of widespread malnutrition and famine, worsened by the government's rejection of outside observers and reluctance to admit the seriousness of the situation, despite its unprecedented appeal for foreign aid in 1995. Lacking money to fuel and repair tractors, and to pay for fertilizer, the government had called for and/or allowed the cultivation of marginal land with professed target of doubling food production. The counter-productive result was crop-destroying flooding in 1995 and 1996 when the country was hit by heavy rains and a typhoon because the removal of tree cover from hillsides through the cultivation of marginal land made flooding worse. Drought conditions that followed worsened not only the food shortage but also the energy shortage by reducing the output from hydroelectric facilities. By 1997, most North Koreans had come to depend on government rations, which were reduced to 3.5 to 5.3 oz. per person a day. In 1997 construction began on what were now to be two 1000 MW LWRs, delayed many months by North Korean objections to the use of a South Korean firm for the job. Estimates are that in real terms the DPRK economy contracted 6.8% in 1997 and another 1.1% in 1998. In 1999, there were signs of positive growth, though small and from a low base, and due mainly to government construction projects.

The Bank of Korea, the most reliable source of economic data on the DPRK, estimates that the economy expanded 1.3% in 2000 and 3.7% in 2001. In 2002, albeit unannounced, a series of market-oriented reforms were undertaken. Refugees reported wage increases of 10% to 20% that partly reflected the higher prices in the unofficial "farmer's markets" and black markets, and that state rationing was being phased out. Three new special economic zones (SEZs) were announced, making a total of four (the first one established in 1991), designed to attract foreign investment, particularly from China and South Korea. A defector reported a significant reduction in the party personnel attached to two major state corporations, the Musan Consolidated Mine Corporation and the Kimchalk Consolidated Steel Corporation. Whether such reforms were meant to appease the more confrontational Bush administration, which, through US president George W. Bush's State of the Union address in January 2002, had branded North Korea as part of an "axis of evil." In November 2002 the United States announced that it was suspending oil shipments, and that the work on the LWRs was going to be deliberately slowed. In December 2002, the DPRK expelled the last IAEA inspectors and removed their monitoring devices. In February 2003, the IAEA referred the matter of the DPRK's nuclear program to the UN Security Council. The program of economic inducements has been transformed into a zero-sum confrontation.