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North Korea: Anything left to
revive?
By Jamie Miyazaki
Part 1: Adam Smith comes to North
Korea
Last month's World Trade
Organization (WTO) meeting in Cancun, Mexico, was widely
acknowledged as a failure, with neither the developed
world securing its aims of drafting global investment
rules nor the developing world prying open the gates to
the wealthy countries' heavily fortified agricultural
markets.
But for one country at least, the
failure in Cancun was for all intents and purposes
utterly irrelevant. That country is North Korea.
To Pyongyang, encased inside its autarkic
juche ideological cocoon, trade has never, at
least not publicly, been a priority. With the United
States offering all sorts of olive branches, the North
Koreans on Tuesday nonetheless dismissed as "laughable"
a US offer to provide multilateral security guarantees
in exchange for ending their nuclear-weapons program,
saying it wasn't even worth considering - hardly an
auspicious sign that the country wishes to rejoin the
world.
Until the collapse of the Berlin Wall in
1989, North Korea had survived on a haphazard mix of
barter and subsidized imports from its communist-bloc
partners while its supposedly glorious workers'
revolution marched onward and upward.
Unfortunately, the 1990s proved to be a disaster
for North Korea as subsidized imports of oil and other
commodities dried up and the country was hit by natural
disasters and famine. A few hundred thousand, perhaps
millions, of unlucky North Koreans starved to death and
the economy nosedived, recording nine straight years of
contraction.
Incredibly, North Korea and Kim
Jong-il's regime came out of the other side of this huge
economic implosion more or less intact. What was left of
the country's economy bottomed out in 1998, and since
1999 it has been recording positive economic growth -
admittedly fairly small (2001 being the exception, when
the economy grew by a respectable 3.7 percent according
to the Bank of Korea). Although its gross domestic
product (GDP) remains a shadow of its former self, for
the moment at least North Korea is in the midst of a
fragile low-growth trajectory.
Unfortunately,
the ideology underpinning North Korea's economy is
plainly incapable of providing sustainable long-term
growth. This uncomfortable fact has not gone unnoticed
by the normally blase Pyongyang administration, and it
has taken a number of measures to nurse the economy back
on to its feet. These steps have included establishing a
host of special economic zones (SEZs), "liberalizing"
prices, introducing accounting systems for enterprises,
and emphasizing profitability.
All these
measures represent incremental steps away from the
juche ideology and a possible "capitalist creep"
in economic policy. This year's New Year editorial, the
de facto annual North Korean policy roadmap, went as far
as to assert that "we should manage and operate the
economy in such a way as to ensure the largest
profitability while firmly adhering to the socialist
principle" and dubbed 2003 "The Year of Brave Offensive
and Ambitious Reform".
So just how bravely
offensive and ambitious have Pyongyang's reforms been?
And, more important, how successful have they been in
getting the economy back on track?
There has
been a change in emphasis on which economic sectors
represent the strongest prospect of revitalizing North
Korea over the past few years. Up until 1999 Pyongyang's
emphasis had been on stimulating the agricultural sector
then promoting heavy industry and finally light
industry. But since then, the emphasis has changed, with
heavy and light industries being pushed and agriculture
receiving less priority. This corresponds with the
receding, although still present, threat of famine. The
objective now is to get the industrial sector moving.
But is there anything really left to save and
regenerate?
So far this year North Korea has
managed to muddle through and feed its people, and
farmers' markets appear to be well stocked. Agriculture
actually put in a fairly solid performance last year,
recording 4.2 percent growth and 6.8 percent the year
before last. This has been in part due to favorable
weather conditions, lots of donor aid and last July's
price reforms.
While last year's reforms did not
represent any real shift to a market economy, they did
significantly increase the economic incentive for
farmers to produce rice. The agricultural sector thus
appears to be on a fairly even keel.
But all
this good news merely disguises very serious structural
problems in North Korea's agricultural sector. The
floods of the mid-1990s wiped out about 15 percent of
the country's already scarce arable land and
disproportionately affected high-quality arable land.
North Korea has run a food deficit of between 1 million
and 2 million tonnes since the mid-1990s and only
avoided another bout of serious famine because of aid
(which represents about 90 percent of total imports)
from the international community. The generosity of
donors, however, tends to be finite and can be worn very
thin by illegal nuclear-weapons programs.
North
Korea also suffers from the problem that its terrain and
geographical location are not ideally suited for
agriculture, hence farming is highly dependent on
fertilizers and machinery. Unfortunately, fuel shortages
have impeded the use of agricultural machinery, forcing
the reintroduction of draft animals.
The two
primary fertilizers used in North Korea, urea and
ammonium sulfate, are both petroleum-based, adversely
affecting rice productivity. Moreover, North Korean
fertilizer factories are outdated and suffer from a lack
of electricity that plagues the economy as a whole and
creates serious production bottlenecks; only 40 percent
of fertilizer demand is believe to have been met. South
Korean fertilizer aid is one of the major lifelines
keeping the North's farmers afloat and hungry
Northerners' stomachs at least half-full.
No
amount of rallies and workers' songs are capable of
changing the harsh reality that North Korea cannot
become agriculturally self-dependent. However, boosting
productivity through more seeds, fertilizer and
agricultural equipment would go a long way to closing
its current food deficit. Unfortunately, while the
nuclear standoff continues, the necessary amount of aid
looks to be not forthcoming.
On the other hand,
while North Korea's food security seems temporarily to
be reasonably assured, it is probably wise for the
government it to focus on industry in order to restart
the economy.
Unlike its agricultural
counterpart, the industrial sector's fortunes have been
rather mixed over the past few years. After a healthy
expansion of 3.5 percent in 2001, last year saw a 2
percent contraction, according to the Bank of Korea (the
South's central bank), and industry is thought to be
running at just 10-15 percent of capacity. However, the
state of North Korea's industry is probably more nuanced
than last year's contraction suggests.
During
the 1970s North Korea invested considerably in heavy
industry, especially in petrochemicals, power, coal and
metals and railway transport, which account for the
lion's share of its industrial sector. These facilities
remain in operation, but lack of electricity, poor
maintenance and a malnourished workforce have meant that
much of the country's industry is in an advanced state
of disrepair and functioning with decrepit technology
when power supplies permit it to function at all.
Last year the heavy-industry sector contracted
by 4.2 percent, wiping out all gains from the previous
year. This year has not appeared to be too different,
despite Finance Minister Mun Il-bong's dubious claims
that the manufacturing sector expanded by 12 percent.
But within the light industrial and construction
sector, the outlook does appear rosier. The reforms of
July 2002 stimulated light industry and it witnessed a
2.7 percent expansion. "The modernization of light
industry should be accelerated to increase the
production of quality consumer goods," trumpeted 2003's
New Year editorial. And, judging from farmer's markets'
expansion to cover industrial products, last year's
growth seems to be holding up. Compared with the
decaying graveyard of heavy industry, Pyongyang's
emphasis on light industry is astute.
When China
and Vietnam started their reform policies, about 70
percent of their populations were employed in the
agricultural sector, hence their economic reforms
targeted rural communities first. North Korea, by
comparison, employs only half this percentage in
agriculture, thus the need to focus reform policies on
industry. Last year's reforms granting companies greater
autonomy (although it is unclear what degree of autonomy
they now have) and emphasizing profit-making should be
an effective death knell for the heavy-industry zombies.
However, it is likely the government will keep them just
functioning, most likely through funds raised via this
year's People's Bonds Lottery.
The less
energy-intensive light industrial sector, supplying
consumer products such as shoes and blankets, is the
most likely candidate to power the economy and feed,
clothe and employ the population. If North Korea ever
gets its act together and starts trading with the wider
world, this is the sector where it has a comparative
advantage. Pyongyang has been championing basic
processed goods (thus far primarily textiles) as the
first possible steps in an export-based growth strategy.
However, even in the light industrial sector the
outlook is far from certain. Processed and manufactured
goods (excluding arms sales) have actually fallen as a
percentage of exports and textiles in particular
appeared to have been hit hard as the Japanese market
dried up. (Kidnapping and nuclear weapons haven't been
very effective in expanding market share.)
Meanwhile animal products, primarily seafood,
have become Pyongyang's leading export, jumping by a
hefty 65 percent last year to US$261 million. Moreover,
despite the huge famine and crop failure of the 1990s,
agriculture has actually expanded as a share of GDP,
suggesting the economy is de-industrializing. North
Korea's economy today more closely resembles a retarded
version of post-Soviet Moldova than the 1970s China
embarking on economic liberalization.
Central to
the economy's retardation is the lack of dependable
energy resources. The electricity supply, generation and
distribution systems have degraded to the point that an
estimated 30 percent of generated power is lost, with
power generation contracting last year after some modest
growth. North Korea is very dependent on coal but,
because of a lack of electricity to run mine facilities
and the flooding of mines, coal production has
plummeted. If energy-supply issues aren't tackled soon,
the nation could enter a vicious circle. This has led to
an over-reliance on hydroelectric plants, but their
output is limited by maintenance problems and the
seasonal nature of river flow.
Money and energy
supply are two problems that don't look set to disappear
any time soon, and as long as this is the case any
attempts at economic revitalization will ultimately be
hamstrung. Attempts to counter these issues have seen an
emphasis on productivity gains, and various approaches
have been touted - seed technology, science and
human-resource development to name a few. Recently
information technology has been heralded as the new
vehicle for economic development, and it has the
advantage of requiring very few material resources, but
how successful this new tactic will be remains to be
seen.
So with just over two more months left of
"The Year of Brave Offensive and Ambitious Reform", how
is it shaping up? Not too promising as of yet would be a
fair assessment. There is no sign that Kim intends to
encourage private business or give individual farmers
bigger plots of land on which to grow crops for profit -
measures that had a considerable impact in China - and
North Korean industry cannot recover without massive
investment, which could come only from abroad.
It is worth bearing in mind that China and
Vietnam's modernizations only began after the death of
their revolutionary leaders, Mao Zedong and Ho Chi Minh
respectively. With Kim Jong-il's regime intrinsically
tied to that of his late father, Kim Il-sung, there has
been no radical change in leadership. Il-sung was most
certainly not a Mikhail Gorbachev or Deng Xiaoping. In
fact it would be a stretch to dub North Korea a
developing nation. It is a nation going
downhill.
Yet despite this, some glimmers of hope
exist in the gloom - the nascent entrepreneuralism of
the farmer's markets and the recovering light industrial
sector. Perhaps there are still things worth reviving in
North Korea after all.
(Copyright 2003 Asia
Times Online Co, Ltd. All rights reserved. Please
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