Economy of North Korea - Crisis and Famine

Crisis and Famine

In the 1990s the North Korean economy saw stagnation turning into crisis. Economic assistance received from the former USSR and China was an important factor of its economic growth. In 1991 the former USSR withdrew its support and demanded for payment in hard currency for imports. China stepped in to provide assistance and supplied food and oil, most of it reportedly at concessionary prices. But in 1994 China reduced its exports to North Korea. The rigidity in the political and economic systems of North Korea left the country ill-prepared for a changing world. The North Korean economy was undermined and its industrial output began to decline in 1990. Deprived of industrial inputs, including fertilizers, pesticides, and electricity for irrigation, agricultural output also started to decrease even before North Korea had a series of natural disasters in the mid-1990s. This evolution, combined with a series of natural disasters including record floods in 1995, caused one of the worst economic crises in North Korea's history. Other causes of this crisis were high defense spending (about 25% of GDP) and bad governance. It is estimated that between 1992 and 1998 North Korea's economy contracted by 50% and several hundred thousand (possibly up to 3 million) people died of starvation. A former North Korean farmer who has defected reports that despite the famine he was ordered by the government to grow not food but opium, which was then refined into heroin by the government for international smuggling.

In December 1991, North Korea established a "zone of free economy and trade" to include the northeastern port cities of Unggi (Sŏnbong), Ch'ŏngjin, and Najin. The establishment of this zone also had ramifications on the questions of how far North Korea would go in opening its economy to the West and to South Korea, the future of the development scheme for the Tumen River area, and, more important, how much North Korea would reform its economic system.

North Korea announced in December 1993 a 3-year transitional economic policy placing primary emphasis on agriculture, light industry, and foreign trade. However, lack of fertilizer, natural disasters, and poor storage and transportation practices have left the country more than a million tons per year short of grain self-sufficiency. Moreover, lack of foreign exchange to purchase spare parts and oil for electricity generation left many factories idle.

The 1990s famine paralyzed many of the Marxist-Leninist economic institutions. The government pursued Kim Jong Il's Songun policy, under which the military is deployed to direct production and infrastructure projects. In 2002 Kim Jong Il declared that "money should be capable of measuring the worth of all commodities", followed by some small market economy relaxations and creation of the Kaesong Industrial Region with good transport links to South Korea. Experiments are under way to allow factory managers to fire underperforming workers and give bonuses. China’s investment increased from about $1 million in 2003 to $200 million in 2004. China has counseled North Korea’s leaders to gradually open the economy to market forces.

As of 2007, North Korea's economy remained one of the world's most highly centralized and planned, even by pre-1990 communist standards. Complete "socialization" of the economy was accomplished by 1958, when private ownership of the means of production, land, and commercial enterprises was replaced by state or cooperative (collective) ownership and control. As a result, industrial firms were either state-owned or cooperatives, the former contributing more than 90% of total industrial output in the 1960s.

As a consequence of the government's policy of establishing economic self-sufficiency, the North Korean economy has become increasingly isolated from that of the rest of the world, and its industrial development and structure do not reflect its international competitiveness. Domestic firms are shielded from international as well as domestic competition; the result is chronic inefficiency, poor quality, limited product diversity, and underutilization of plants. This protectionism also limits the size of the market for North Korean producers, which prevents taking advantage of economies of scale.

At the same time, the years of famine were also marked by dramatic revival of private market activities, often technically illegal. Smuggling boomed, and up to 250,000 North Koreans moved to China. The widespread government corruption led to a near complete collapse of old controls and regulations which were not enforced any more. When fuel became scarce while demand for logistics rose, so-called servi-cha (서비차， “service cars”) operations formed, wherein an entrepreneur provides transportation to businesses, institutions and individuals without access to other means of transportation, while the car is formally owned by a legitimate enterprise or unit that also provides transportation permits. Some experts have described the process as "capitalism from below" or "natural death of North Korean Stalinism". The average official salary in 2011 was equivalent to $2 per month while the actual monthly income seems to be around $15 because most North Koreans earn money in illegal small businesses: trade, subsistence farming, and handicrafts. The illegal economy is dominated by women because men have to attend their places of official work even though most of the factories are non-functioning.