The Political Economy of North Korea: Domestic, Regional, and Global Dynamics 9781955055659

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The Political Economy of North Korea

The Political Economy of North Korea Domestic, Regional, and Global Dynamics edited by

Min-Hua Chiang

b o u l d e r l o n d o n

Published in the United States of America in 2022 by Lynne Rienner Publishers, Inc. 1800 30th Street, Suite 314, Boulder, Colorado 80301 www.rienner.com

and in the United Kingdom by Lynne Rienner Publishers, Inc. Gray’s Inn House, 127 Clerkenwell Road, London EC1 5DB www.eurospanbookstore.com/rienner

© 2022 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data Names: Chiang, Min-Hua, 1978– editor. Title: The political economy of North Korea : domestic, regional, and global dynamics / edited by Min-Hua Chiang. Description: Boulder, Colorado : Lynne Rienner Publishers, Inc, [2022] | Includes bibliographical references and index. | Summary: “A systematic overview of North Korea’s political economy, including the wide range of domestic, regional, and global factors at play”— Provided by publisher. Identifiers: LCCN 2022006399 (print) | LCCN 2022006400 (ebook) | ISBN 9781955055451 (hardcover) | ISBN 9781955055659 (ebook) Subjects: LCSH: Korea (North)—Economic conditions. | Korea (North)—Economic policy. | Korea (North)—Foreign economic relations. | Korea (North)—Politics and government. Classification: LCC HC470.2 .P65 2022 (print) | LCC HC470.2 (ebook) | DDC 338.95193—dc23/eng/20220425 LC record available at https://lccn.loc.gov/2022006399 LC ebook record available at https://lccn.loc.gov/2022006400

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1992.

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Contents

Acknowledgments

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1 The North Korean Puzzle Min-Hua Chiang

1

Part 1 Domestic Dynamics

2 A Self-Reliance Economy Under Kim Il Sung William B. Brown

21

4 Byongjin Economic Policy Under Kim Jong Un Young-chul Chung, Yong-hyun Kim, and Kyungyon Moon

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3 Economic Transformation Under Kim Jong Il Sangsoo Lee

Part 2 Regional Dynamics

45

5 Cooperation with South Korea Hyo-young Lee

79

7 The Renewed Role of Russia Olga Garanina

121

6 Support from China Tat Yan Kong

99

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Contents

8 The Importance of Japan Yanghyeon Jo

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Part 3 Global Dynamics

157

10 The Evolving Role of Europe Antoine Bondaz

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9 Relations with the United States Troy Stangarone

11 Foreign Policy and Nuclear Development Strategy Denny Roy

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12 The Limitations of UN Sanctions Min-Hua Chiang

213

Part 4 Conclusion

13 Whither North Korea’s Economy? Min-Hua Chiang

233

Bibliography The Contributors Index About the Book

243 277 279 283

Acknowledgments

without the assistance of many people. The book is a collective effort, and I am indebted to all the chapter contributors for their endeavors to bring this research project to fruition. I appreciate their profound knowledge and expertise, which added immense value to the book. I thank them for their kindness and friendship that made the process of editing the book a joyful one. Special thanks go to Philip, who made time in his busy schedule to read and edit my first draft. I would like to express my gratitude to the Korea Foundation for its generous offer of a Field Research Fellowship in 2019, which allowed me to conduct interviews and study North Korea while in Seoul. Despite the persistent political divide, there have been plentiful discussions in South Korea about North Korea. The debates were fascinating, usually involving scholars from countries across the world. I benefited from attending various events and interacting with experts on North Korea. I particularly thank Yanghyeon Jo at the Korea National Diplomatic Academy, Hahnkyu Park and Jiyoun An at Kyung Hee University, and Sung Chull Kim at Seoul National University for their great hospitality during my three-month stay in South Korea. I am grateful to all the interviewees in both academia and the private sector in Seoul, who spent their precious time sharing their perspectives on North Korea’s economy. Marie-Claire Antoine, senior acquisitions editor at Lynne Rienner Publishers, helped me shape the book’s contours at the initial stage and answered my countless inquiries patiently. The whole editorial team at Lynne Rienner Publishers provided excellent and professional publication services.

The publication of this book would have been impossible

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Numerous people have enlightened me on my North Korean research journey. I am not able to list their names here, but I am grateful for all their invaluable help. This is my first attempt as a political economist in East Asian studies to elucidate North Korea’s economy from a broad perspective. Rather than merely adding one more work to my publication list, I hope to provide a book that will be a helpful reference for researchers in North Korean studies. Furthermore, North Korea is in need of external help to foster its economy and improve people’s livelihoods. This effort will require not only politicians’ initiatives but also intellectuals’ collective wisdom to find an alternate path out of the current impasse.

1 The North Korean Puzzle Min-Hua Chiang

The Democratic People’s Republic of Korea (North Korea, or the DPRK) is a missing piece in East Asia’s economic development literature. Despite its rapid economic recovery from the Korean War, there has been relatively less discussion about the country’s economy in academic works. In recent years, North Korea has been known mostly for its nuclear development. Due to limited access to the DPRK’s economic data, some 25 million people live in a country where information about their quality of life and economic surroundings is still scant. For example, data from the United Nations shows that most North Korean people work in the agricultural sector, accounting for over half of total employment in 2020; meanwhile, 13 percent of total employment was in industry, and 34 percent was in services.1 However, statistics from the World Bank indicate that 62 percent of the population lives in urban areas and is unlikely to work in the agricultural sector.2 A possible explanation is that people officially registered as working in the agricultural sector may in fact be working physically in other industrial or service sectors. The inadequate remuneration in agricultural sectors explains the exodus of people to private businesses in the market. Indeed, North Korea’s geographic condition does not allow it to possess a comparative advantage in developing its agricultural sector. The large number of people living in the urban areas could also be a result of a booming underground market economy in the last two decades, which is not reflected in the official statistics. The country’s economy could have developed to an extent that the limited data can hardly elucidate. Obviously, there is a need to investigate the DPRK’s economy quantitatively and qualitatively. This book aims to contribute to the latter. It hopes not only to provide better

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understanding about the country’s economy but also to help toward the completion of the East Asian economic-development map. A primary objective of the North Korean leader was to reconstruct the post–Korean War economy. North Korea is mountainous and rich in mineral resources. The heavy industry and hydroelectric power infrastructure left by the Japanese from the colonial period (1910–1945) allowed the country to quickly resume its industrial production after the war.3 Hence, North Korean economic planners geared the country toward heavy industrialization by making use of its abundant natural resources and industrial base inherited from the Japanese colonial government. However, in contrast to other East Asian countries’ resumption of external trade exchanges after the war, the DPRK’s economy remained relatively closed to the outside world. Its domestic production was mostly destined to satisfy demand inside the country. Based on Kim Il Sung’s juche (self-reliance) ideology, the DPRK’s goal was to establish a self-reliant economic system with limited trading sectors. The North Korean leader was even reluctant to trade with other communist countries.4 Politically, juche aimed to reduce the political-economic leverage of the Soviet Union. Ironically, the so-called self-reliance economy was able to maintain high economic growth rates thanks to the influx of aid from the Soviet Union from 1954 to 1960, apart from the postwar economic rebound. North Korea’s moderate economic growth in the 1960s and 1970s is explained by its import-substitution policy, which facilitated domestic production, and foreign direct investment (FDI) from ethnic Koreans in Japan.5 In the meantime, financial aid from the Soviet Union continued to underpin North Korea’s economic development despite deteriorating bilateral relations.6 The DPRK’s reliance on the Soviet Union for its economic development was similar to other East Asian countries’ economic reliance on the United States after the war. The difference is that East Asia’s development strategy had transformed from relying on US financial aid to promoting exports later on. On the other hand, North Korea’s economy remained reliant on Soviet financial aid. The different choices in economic policy yielded a clear difference in economic performance. East Asian countries achieved postwar industrialization and high economic growth through the adoption of export-oriented economic development strategies. Many of them benefited from division of labor in the regional production network, constructed through massive inward FDI in the manufacturing industry. In comparison, North Korea’s economy was isolated from the regional and global economy due to its ideological emphasis on self-sufficiency. Its import-substitution policy proved unsustainable in the end. Without significant exports to earn foreign currency, the country was heavily in debt due to its continuous purchase of capital equipment and machinery from abroad. The country eventually fell into greater difficulties in its debt

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repayment due to the plunging prices of nonferrous metals (North Korea’s main export items) after the two oil crises in the 1970s. The DPRK regime tried to open its economy, as had the other East Asian countries, since the 1980s for more foreign trade and investment, but failed to achieve the same economic success. The unfruitful outcome can be attributed to the DPRK’s centrally planned economic system, continuous political and economic isolation from the international community, inadequate infrastructure, and malfunctioning economic system.7 More importantly, the regime lacked strong determination to reform the economy. The government feared that the influx of foreign capital and information would lead to political destabilization in the country. The potential challenge to the government’s authority constrained the level of opening to foreign investors and external trade. In sum, the DPRK government has been trapped in a dilemma between economic development and political instability. On one hand, the government could strengthen and legitimize its “totalitarian” system through promoting economic development. On the other hand, economic development, driven by greater inflow of FDI and external trade expansion, could result in the redistribution of economic interests in the country, posing threats to the regime’s power control. The interplay between politics and economics is not new in economic development literature. East Asia’s economic development experiences have shown that economic development and authoritarian political systems can coexist, at least for a time. The International Political Economy Perspective Over the decades, international political economists have been debating the best route to develop poor countries’ economies. For neoclassical economists, market openness, fiscal discipline, and noninterventionism are key to economic development. On the other hand, the theory of the developmental state claims that governments, instead of market forces, play a central role in guiding economic development. Advocates of market-led economic development argued that state-led development results in serious distortion in the allocation of domestic resources and impairs a country’s development prospects in the long run. Latin American countries’ adoption of import-substitution industrialization (ISI) and the economic stagnation that followed provided clear evidence of the failure of the state-led development approach.8 Nevertheless, in contrast to Latin America, East Asia’s high economic growth through an export-led development strategy after a short period of ISI was praised as a model of economic development for developing countries. East Asia’s economic success became strong evidence for developmental state supporters in favor of the importance of state policy in

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guiding development.9 Following newly industrialized economies (NIEs)— namely, Taiwan, Singapore, Hong Kong, and South Korea—other Asian countries also achieved high economic growth rates by adopting similar export-led economic development models. The developmental state theory thus prevailed in the 1980s and 1990s thanks to successful economic development in many East Asian countries with strong state intervention. The East Asian countries’ economic success also made traditional dependency theory unsuitable for elucidating economic development. Dependency theory claimed that the advanced countries’ development, through expropriation of economic resources from developing countries, would keep them less developed. Although those East Asian economies were dependent on foreign trade and FDI, this dependence did not lead their economies to failure, as dependency theory predicted. Nevertheless, the developmental state suffered setbacks after the Asian financial crisis (AFC). Neoclassical economists thus argued that the AFC proved the economic development model based on free markets and minimal state intervention is the best. In response, developmental state theory supporters reasoned that the huge investment in the region was driven by irrational international investors. The excess world liquidity was generated mainly in the core economies. The global financial institutions and powerful countries in the West also bear responsibility for the premature liberalization of financial markets and capital accounts in the region.10 Apart from the debate between neoclassical economists and defenders of developmental state theory, some scholars suggested a third factor that contributed to East Asia’s economic development: the United States’ economic power presence in the region. The US market’s opening to the products manufactured in and exported from East Asian countries constituted the main driving force behind the region’s economic growth. The United States’ massive consumption of goods from East Asia made the regional production network a success. Regional division of labor in manufacturing production is of no use if there isn’t a market large enough to absorb the final products. America’s tolerance of goods imported from East Asia has been linked with its strategic consideration since World War II. Under what Berger called “the US-led modernization project,” a group of capitalist countries were successively developed after the war.11 Development centered on state-guided national development in these countries was associated with America’s security interests against the communist regimes between the 1940s and the 1970s. In Ikenberry’s view, these security and economic relationships between the United States and Asia grew into a complex system of interdependencies. The Asian countries export goods to America, while America offers military protection for these countries. Asian countries accumulate substantial trade surpluses through exported goods, while these surpluses are used to finance the American deficit.12

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This particular regional economic development phenomenon can be divided into several different waves. The first country that initiated outstanding economic progress is Japan. During the 1960–1970 period, the economic growth rate in Japan, driven by exports to the American market, was about 10 percent per year.13 It soon became the largest economic powerhouse in the region. After Japan, the four NIEs received sunset sectors from Japan and adopted similar export-led development strategies. At the same time, Japan moved into higher-technology production. Next, the new NIEs (NNIEs)— including Thailand, Malaysia, the Philippines, and Indonesia—also followed export-led economic development strategies. The NNIEs received the laborintensive manufacturing industries from the NIEs and created another wave of the East Asian miracle. China and Vietnam followed the same development model after political reconciliation with America. Starting in the late 1980s, China and Vietnam replaced the NNIEs and became the fastestgrowing exporters in labor-intensive manufacturing sectors. China, in particular, emerged as a new engine that drove regional economic growth. Based on each country’s level of economic development, each was engaged in a different part of production for the same final products. The East Asian countries’ different roles in manufacturing production from laborintensive to high-technology and capital-intensive production drove the circulation of industrial goods between countries in the region. Much of the trade in industrial goods between countries in the region was induced by global multinational corporations (MNCs) that aimed at final consumption for the global market. The United States is the main final-consumption goods market after manufacturing in East Asia. As such, the United States’ consumption capacity played a key role in the export-led economic growth in East Asia. At the same time, the United States is also an important supplier of high-value-added goods and services to the region. The technology transfer from American investors to local manufacturers in the region occurred before the rise of Japanese outward investment in the 1970s and 1980s. The point of view centered on the United States’ leading position in Asian economic development and integration also leads to an adaptation of the “flying geese” model. Different from the traditional “flying geese” model, which saw Japan as the initial goose, Ozawa suggested the Asian economic miracle was actually led by the United States as the first goose, followed by Japan, the NIEs, the NNIEs, China, and Vietnam. The Pax Americana constitutes an economic system that Ozawa called “hegemon-led macro-clustering,” an extended outcome of “Pax Britannica–led macro-clustering.”14 The explanation, centered on the United States as the core in the regional economy, is linked with modern world system (MWS) theory. Influenced by the Marxist perspective and the French Annales school of thought, MWS extends the Marxist reasoning behind the hegemonic state in a capitalist world. Within this world system, the interaction between international

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trade and investment is considered the fundamental mechanism for maintaining this structural feature. In order to compare the relative position of each region within the world economy, as well as certain internal political and economic characteristics, Immanuel Wallerstein proposes three different categories—core, periphery, and semiperiphery—into which all regions in the capitalist world economy can be placed. While the core focuses on capital-intensive production, the periphery emphasizes production of laborintensive goods. Between the two extremes lie the semiperipheries. Wallerstein asserted that, rather than providing prosperity for all of the countries, the capitalist world system has brought about a distorted development that has led to economic and social disparities between the different regions in the world economy.15 While the division of labor in the East Asia region and the United States looks similar to MWS’s economic structure, the distorted economic development as a consequence is not necessarily accurate. Several East Asian economies, such as NIEs, have developed to an extent comparable to the advanced countries in the West. China, the economy at the periphery, emerged as the greatest challenge to the core economy. Indeed, the complex interaction between internal and external factors made it such that no single theory alone can explain the economic development path properly. Market-led economic growth would rely on the governments to adapt business-friendly rules. Government-led export-oriented policy alone cannot push the economy to grow without strong global demand. A prosperous world economy cannot guarantee economic growth if domestic rules restrict local firms from engaging with overseas business. Another critique is that the international political economy (IPE) perspective tends to theorize development by investigating empirical cases in advanced countries. The lack of empirical studies from other developing countries limits the theories’ wide applicability to a variety of countries. Certainly there is not only one pathway toward development. The greater inclusion and investigation of a variety of countries’ development experiences provides inputs for advancing economic development theories. Capitalist Countries’ Development Bottleneck At the end of the 1970s, several countries in East Asia emerged as an economic threat to the American domestic market following the success of their export-led strategy. The result was a mounting deficit in the US trade balance. The continuous US trade deficit with Japan and the NIEs triggered the rise of American trade protectionism. In 1974, Section 301 of the US Trade Act was formulated as the principal statutory authority under which the United States might “impose trade sanctions against foreign countries that maintain acts, policies and practices that violate, or deny US rights or

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benefits under trade agreements, or are unjustifiable, unreasonable or discriminatory and burden or restrict US commerce.”16 In 1988, the US Congress passed the Omnibus Trade and Competitiveness Act, which required the US government to investigate foreign trade barriers on US exports and to negotiate with the large Asian exporters on the trade imbalance by provoking the Super 301 provision, a trade retaliation against foreign countries. To be removed from the blacklist of the Super 301 provision, several countries had to open more to foreign goods and services. This required tremendous domestic economic reforms to cope with the impact of the greater economic liberalization, notably exchange rate relaxation and simplified import procedures. The United States’ trade deficit with Asian countries gradually reduced. However, that doesn’t mean the US trade protectionist policy worked. It was rather the result of China’s becoming the final production site and export platform. China received semi-industrial goods from other Asian countries and assembled them into final goods for export. As such, the nature of US-Asian economic relations (Asia produces and America consumes) did not change. America’s trade deficit simply transformed from one with several countries to one merely with China. As many manufacturers in Asian countries used China as an export platform, China is like a combination of the US trade deficit with several countries involved in the regional production network. Many Asian countries regard amassing foreign exchange reserves via exports as self-insurance against sudden negative financial shocks. The United States’ long-term securities held by foreign governments surged from US$4.466 billion in September 2011 to US$7.549 billion in September 2021. Of this, around 44 percent was held by East Asian countries.17 As for the United States, deepening economic relations with countries in the region could reinforce US-Asian economic interdependence and further sustain the US economy with growing debt. However, there is a risk that the more trade surplus and US treasury bonds are held by Asian countries, the more worrisome the potentially large depreciation of US currency. An important reason why the economic system based on the US accumulation of debt is supported by most Asian countries is that there is no better alternative. In consideration of its relatively lower gross domestic product (GDP) per capita and high saving rate, China is apparently not able to replace the US role as the largest consumption market. Besides, the continuing stability of China’s macro-economic situation, domestic politics, and society is still uncertain. If North Korea chooses to pursue its economic development in the conventional “Asian way,” as mentioned above, it will have to bear greater opening to foreign goods and services after reaching a certain level of economic development. Economic liberalization and free trade are the current trend in the region. North Korea will have to conduct several domestic

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reforms to meet the international standard in trade and investment. It does not seem possible for North Korea to choose this development path at this stage. Apart from its domestic political constraints, which limit its level of economic opening, North Korea’s following of East Asia’s development model also implies its exodus from China’s influence, which might put China in a geopolitically disadvantageous position. North Korea and the Transitional Economies Export-oriented economic development is an important feature of the postwar capitalist economic system. The communist economic system, however, led by the Soviet Union and based on central planning, was another plausible development alternative during the Cold War era.18 Communism also spread to several important economies in addition to the Soviet Union, such as China, Vietnam, and North Korea in Asia and Ukraine, Poland, Romania, and East Germany in Europe. Despite remarkable economic growth in the beginning, the Soviet economic development model failed at the end of the 1980s. Rapid economic growth among the communist countries after the war is explained by rapid growth in input, including expansion of employment, increases in education levels, and massive investment in physical capital. This is unlike the capitalist economic system, which relies on enhancing productivity for economic growth. When the input hits the limits, the return diminishes as a result.19 The collapse of the Soviet Union demonstrated that the communist approach to developing the economy was problematic. By the early 1990s, the two largest communist states in the world had already abandoned communism. Russia transformed into an economy dominated by natural resources. Despite its institutional form of democracy, authoritarianism remains in its political culture.20 Before the collapse of the Soviet Union, China had already followed the rest of East Asia’s economic growth model through promoting inward FDI and exports. However, its political system remained a one-party-dominated dictatorship. To justify its one-party dominance and fundamental ideology in Marxism-Leninism and Maoism, China calls its adaptation of the capitalist economic system “socialism with Chinese characteristics.”21 Despite its differences with other capitalist countries, Chinese president Xi Jinping has portrayed his nation as dedicated to furthering global economic integration. Indeed, China’s involvement in economic globalization is a strong driving force behind its economic prosperity. As such, the country has been making efforts to preserve benefits from globalization. It has not only actively engaged in the market-driven economic globalization process but also established free trade agreements (FTAs) with several important economies in the world.

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Following the collapse of the Soviet Union, several former communist countries in central and eastern Europe adopted market-oriented economic development. The transition from communist to capitalist economic systems was not smooth in the beginning, and development outcomes varied across countries. Hyperinflation and declines in output were the most commonly observed problems during the initial stages of postcommunist transformation. Hyperinflation after price liberalization indicated limited supply and excess demand under the planned economic system.22 The reasons for plummeting output are diverse. The combination of excessive foreign debt and large fiscal deficits aggregated the economic chaos during the transition period.23 The rush to impose standard privatization and regulation before appropriate market institution was established was another cause for the economic setbacks.24 For neoliberalism, the postcommunist recession was an inevitable consequence of economic transition from communism to capitalism. Given the fundamentally different economic systems, it is understandable that the adjustment would take time. Communist culture also made the transition process difficult. According to the cultural legacy argument, communist economic systems created passive and dependent people. The crisis-ofgovernance explanation demonstrated that the state failed to operate the national economy during the transition period. When former communist countries started to adopt a market economy, some government elites grabbed state assets for private advantage.25 With time, the resulting chaos during the transition period collapsed their respective economies. Since 2004, the central and eastern European countries (CEEC) region seems to be catching up with western Europe in terms of employment and economic performance.26 The CEEC’s economic integration into the European Union further improved their economic strength, accelerating their overall economic growth and thus their achievement of greater economic convergence with the western European countries.27 Vietnam is another example of successful economic development in the transition economic literature. Since the economic reform initiated in 1986, Vietnam has achieved high economic growth, spectacular exports, and significant inward FDI and domestic investment. The reform measures started in a small number of provinces. The interprovincial contestations for more market reforms facilitated economic transition and contributed to their economic triumph. Indeed, government officials, at both central and local levels, saw it to be in their own self-interest to limit their power in exchange for a more efficient economy and thus their long-term legitimacy.28 The establishment of property rights, introduction of a competitive market system, privatization of state-owned enterprises, and liberalization of international trade and tax, legal, and accounting regulations are the main reform measures that led Vietnam to become a success story. Unlike in other former

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communist countries in the CEEC, labor productivity in Vietnam never fell below its level at the start of the transition period.29 In general, Vietnam pursued East Asia’s export-oriented development strategy, its bold measures for greater economic liberalization allowing it to outperform other developing countries in the region. The opening of the country’s economy continues, as shown by its active participation in various multilateral FTAs, such as the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. North Korea is a puzzle among the transitional economies. On one hand, the country was able to insist on its communist economic system when many countries in the Soviet bloc started to embrace the capitalist economic system. In keeping with the economic chaos in other postcommunist countries during the transition period, North Korea suffered from the loss of economic support from the Soviet Union as well as its traditional economic links with many former communist countries. The termination of aid from the Soviet Union after its collapse was the most devastating factor to North Korea’s economy, the resulting economic crisis triggering an extreme food shortage from 1995 to 1998. Estimates of the number of deaths due to the famine range between 500,000 and 1 million people.30 On the other hand, although North Korea continues to be governed by the communist regime, the market economy has been functioning within the country for almost three decades. Although the DPRK government has yet to recognize the existence of private sectors within the country, estimated private business activities are already between 30 and 50 percent of North Korea’s GDP.31 In other words, North Korea has been experiencing “economic transition” toward a market economy, though the officials have never acknowledged it. As the market economy has already been operating in the country, economic chaos could be minimized when the market economic system is officially adopted. Nonetheless, rigid domestic politics constrain North Korea’s establishing an institutionalized economic system, which is important for the country to successfully transition into a market economy. North Korea’s Unsuccessful Economic Development Several factors have impeded North Korea’s economic advancement since the country was established. First, as in other communist countries, the incentives for production were low under the socialist economic system.32 North Korea especially lacked the capacity to organize economic institutions based on a socialist framework. Its effort to set up a central planning system was further hindered by its worsening relations with the Soviet Union after Joseph Stalin’s death in 1953.33 The failure of its central planning system was shown in its inflexibility in production and a chronic

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shortage of input and energy.34 Moreover, the self-reliance economic policy resulted in the low competitiveness of North Korean products in the world market and limited access to technology from overseas. Costly military buildup further drained scarce economic resources.35 Externally, the longstanding nuclear standoff with the international community restrained the inflow of international aid and inward FDI, thereby hindering the nation’s economic development.36 After three decades of the self-reliance economic policy, North Korea started to officially extend its economic linkages with the outside world in the 1980s. It first signed trade agreements with the Soviet Union and China in 1984 and 1986, respectively.37 In 1984, the Foreign Joint Venture Law was enacted to attract FDI. The economic crisis of the 1990s forced the government to institutionalize marketization and liberalize external trade a step further. Nevertheless, Kim Jong Il reversed his economic reform efforts after 2005 due to rising income inequality and the weakening of state authority over local officials and newly emerging capitalists. The return to the prior restrictive policy created even more chaos in the economy.38 There are three explanations for North Korea’s inability to carry out reform toward the market economy. First, unlike China’s promotion of “socialism with a market economy,” North Korea’s priority was to protect its economy’s socialist character. North Korea’s monolithic system also resulted in its less dynamic and ultra-cautious reform strategy.39 Second, reforms failed to increase the country’s official food supply and to control rampant inflation. Economic failure triggered a vicious circle of antimarketization, militarization, and stagnation later on.40 Third, some scholars believed that the North Korean government was not sincere about reforming the economy. The law indicated in the People’s Economic Plan of 1999 reasserted state control over the economy and the importance of the central planning system.41 It is also argued that the July 2002 reform was to increase Pyongyang’s organizational control over a failing economy rather than to promote economic development.42 The motivation of the reform was to restore the centrally planned official economic sector by cracking down on black markets and bringing them under state control.43 The South Korean Central Bank’s figures show that the DPRK’s economy has gradually recovered since 2000 despite unsuccessful economic reforms. The booming border trade since the great famine period was believed to have largely sustained the domestic economy. The development of an underground market-oriented economy pushed the economy to grow further. The warming of inter-Korean economic ties through South Korea’s Sunshine Policy may also have improved North Korea’s economy. Nevertheless, the closer inter-Korean economic relations deteriorated after the sinking of the South Korean naval ship Cheonan in 2010. In response to a rocket launched by the DPRK, South Korea has halted all its economic

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engagements with the North since 2016. North Korea’s economic ties with another important trading partner, Japan, also faded after the DPRK acknowledged in 2002 that it had kidnapped Japanese citizens. The Japanese government imposed its most severe economic sanctions on North Korea by ending all bilateral economic activities. China has become the only country that maintains regular and relatively large commercial exchanges with North Korea. After taking office in 2011, Kim Jong Un replaced his father’s “militaryfirst policy” with a policy of “equal importance on the military and economy.” Despite the different slogans, many economic measures adopted by the two leaders are similar in essence. First, Kim Jong Un has maintained his father’s industrial policies with emphasis on the development of the agriculture, coal mining, electricity, rail transport, and metals sectors. Second, like his father, Kim Jong Un has tried to develop the economy by enhancing the authority of cabinet leaders and appointing officials with economic expertise. The two Kims appointed the same cabinet officials to take charge of economic matters. Park Bong Ju served as North Korea’s premier from 2003 to 2007. He was again the premier in 2013 and stepped down in 2019. The same personnel being in charge of economic affairs might explain the similar economic policy measures between the two Kims. Third, the reason for Kim Jong Il’s “military first” policy was to generate spillover effects to the civilian economy due to limited national resources. Although Kim Jong Un highlighted the importance of economic development, the country’s military expenditure continued to surge. His argument is still akin to a “military-first policy”: if nuclear deterrence could guarantee peace, North Korea could channel more efforts into economic construction. The only difference between the two leaders is that so far Kim Jong Un has not yet reverted to any antimarket measures. The current regime under Kim Jong Un seems to be more habituated to marketization than that of his predecessor.44 If no antimarket measures are enacted, North Korea is expected to experience deepening marketization in the future. Nevertheless, North Korea’s insistence on nuclear weapon development and missile tests triggered UN-imposed sanctions on the country. The economy was further severely impacted when the sanctions gradually included several essential economic sectors. Sanctions evasion and a variety of illicit activities have become a core component of the regime’s survival strategy. The meeting between Donald Trump and Kim Jong Un on June 12, 2018, in Singapore raised hopes for the lifting of sanctions against North Korea. The United States also mentioned its willingness to help rebuild North Korea’s economic system if the latter agreed to denuclearize. North Korea seemed interested in following East Asia’s economic development model by promoting FDI and exports. Kim Jong Un particularly praised the development experiences of China, Singapore, and Vietnam as models of reference for

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North Korea. Those countries have been able to develop their economies while restraining political liberalization. Beyond the above three countries, some East Asian countries, such as Taiwan and South Korea, had their economies take off while still under their respective prior authoritarian governments. Nevertheless, North Korea may not adopt the same “developmental dictatorship” in which authoritarianism is tolerated for the sake of economic development. The North Korean leaders have been deeply embedded in the country’s self-reliance and ignorance of the outside world.45 The key to economic development still relies on reforms toward a market economy. Without more deepening reforms, North Korea is not going to achieve a growth rate comparable to that of China, Vietnam, or other East Asian countries. Indeed, the country can achieve a leapfrogging style of economic catch-up, but only through FDI and trade.46 By inserting itself into the regional manufacturing supply chain network through FDI, North Korea could possibly join the export-led economic development path experienced by many East Asian economies. Whether the regime likes it or not, the country has been increasingly reliant for its economic survival on external economic ties, including humanitarian aid, foreign currency earned through overseas North Korean labor, trade, and FDI. The inability to attract foreign capital, transfer technology, and explore new export markets has hindered its economy from progressing. Another critical impediment to North Korea’s economic development is its large share of military expenditure in the economy. The North Korean regime’s deep-rooted anxieties about its external security are reasons for the country’s continuous development of nuclear weapons. The unsuccessful negotiations in Hanoi showed that the United States might have underestimated North Korea’s strong sense of insecurity. In the eyes of the North Korean government, lifting sanctions through a complete denuclearization does not inspire tremendous political and economic interest.47 Apart from national security concerns, without the external threat of “US imperialism,” the Kim regime’s ideological and propaganda system would lose the conceptual basis for its existence. Kim Jong Un also needs to continue nuclear development to maintain a policy of the equal importance of both the military and the economy in North Korea’s national development strategy (Byongjin policy). Although the importance of the economy was highlighted in the Byongjin policy, that doesn’t mean the military is less important than before.48 North Korea’s Growth Potential Developing countries may not be able to imitate the economic developmental practices of advanced countries, given their different external environments

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and cultural and historical backgrounds. In the case of North Korea, its strong sense of insecurity, strong linkage with the Soviet Union and China, and political confrontations with the United States have made it a unique case among the development theories. Economically, North Korea’s growth potential lies in its geographic location, abundant natural resources, and relatively cheap labor force. First, situated between China, Russia, and South Korea, North Korea is an ideal investment destination for investors in the neighboring countries. Second, North Korea has substantial reserves of iron ore, coal, limestone, and metals. A South Korean research institute valued North Korea’s mineral wealth as high as US$10 trillion.49 Third, North Korea has a population of 25 million and a well-educated labor force. The literacy of its people aged fifteen and above is 100 percent.50 This is higher than the average rates in South Asia (72 percent), West Asia (81 percent), and East and Southeast Asia (96 percent).51 Despite limited economic progress so far, compared to many East Asian countries, North Korea’s survival in the past decades could be considered a miracle, given the daunting challenges both internal and external. What the country has experienced is certainly not a model for other countries to follow. However, how the regime can continue to maintain its economic operation and its stability for over seventy years remains an interesting question and needs a systemic review. Despite its regime stability, the economy cannot stay excluded from the outside world forever. A more important question is whether the regime can adopt East Asia’s economic development model or find an alternative way to develop the country. About the Book The book aims to explore North Korea’s economic development process from an IPE perspective. The more specific research questions for this study are as follows: How did North Korea develop its economy after the establishment of the DPRK? What are the similarities and differences in economic policies between the three North Korean leaders (from Kim Il Sung to Kim Jong Un)? How was North Korea’s economy influenced by its relations with the greater world powers? Will the expansion of market activities eventually lead to North Korea’s greater engagement with the global economy? What can North Korea learn from East Asia’s development experiences? How is North Korea’s economy going to be affected by geopolitical factors, especially the growing US-China rivalry? The first part of the book focuses on investigating the main economic issues in North Korea since DPRK establishment in 1948. It discusses how the country’s economy has evolved and transformed over the last few decades. The government’s policy and North Korea’s external relations

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are the main variables in the changing dynamic of the country’s economic development. This part is divided into three chapters. Each chapter addresses the main policy measures and key economic concerns under the three different leaders. In Chapter 2, William B. Brown examines North Korea’s economy under Kim Il Sung, providing a historical overview of North Korea’s economic situation. Brown explores the economic realities behind North Korea’s seemingly respectable economic growth, the origins of juche ideas, and the main economic policy initiatives that were taken at the initial stage of development. Despite a relatively strong industrial inheritance from Japan after the war, Kim Il Sung was not able to successfully improve the living standards of the people, instead pushing hard through a centrally commanded system to develop industry and the military—with far too much emphasis on state investment, a complaint noted by both Chinese and Soviet advisors. Kim oversaw the complete takeover of private capital and farmland, especially after the Korean War, with a devastating drop in productivity. Sangsoo Lee analyzes North Korea’s economy under Kim Jong Il in Chapter 3. Kim Jong Il noted the importance of both economic reforms and North Korea’s connecting with the outside world. However, domestic political constraints did not allow him to proceed with bold reforms constantly. The geopolitical environment at the time was also not helpful for Kim Jong Il to move the reforms forward. His unsuccessful reforms resulted in economic chaos. Kim Jong Il’s main reform measures, the barriers to the reforms, and the consequences to the economy due to his unsuccessful reforms are evaluated in this chapter. Young-chul Chung, Yong-hyun Kim, and Kyungyon Moon examine Kim Jong Un’s economic policy with connection to North Korea’s security in Chapter 4. Unlike his father’s focus, Kim Jong Un’s Byongjin policy prioritized economic development over the military, a new strategy to tackle the growing domestic demand for an improved economy and the new challenges posed by North Korea’s surroundings. Although the policy was still trapped between economic development and national security, the authors argue that Kim Jong Un’s pursuit of “security for development” was different from Kim Jong Il’s “development for security.” The second part of the book shifts to the external factors that helped to sustain North Korea’s economy following the economic crisis of the 1990s. South Korea, China, Russia, and Japan were major players in facilitating North Korea’s economic development. This part analyzes their economic linkage with North Korea and contribution to North Korea’s economy. In Chapter 5, Hyo-young Lee examines inter-Korean economic relations from an economic and legal perspective. The ultimate goal of South Korea’s economic engagement with the North was to reach sustainable peace in the Korean Peninsula. However, political and geopolitical factors

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prevented the South from proceeding with the inter-Korean economic cooperation projects. Lee proposes that instead of a reliance on South Korea’s initiatives alone, international involvement is needed to facilitate North Korea’s economic reforms and eventually reach a sustainable peace in the region. South Korea could be an active player in North Korea’s economic engagement with international organizations. Tat Yan Kong assesses China’s support for North Korea’s economy in Chapter 6. China is widely believed to have continued to support North Korea’s economy despite the UN sanctions that requested countries not have any economic engagement with North Korea. With North Korea’s development of marketization, its dependence has shifted from China’s financial aid to China’s market. In addition to reviewing China’s support to North Korea, Kong analyzes China’s motivations and the factors that have affected its support during the past decades. In Chapter 7, Olga Garanina examines Russia–North Korea economic relations from Russia’s perspective. Moscow’s importance in North Korea’s economy shrank after the collapse of the Soviet Union. Russian policy toward North Korea after the 1990s and its consequences for their economic relations are explored. Unlike during the Cold War, Russia today is not able to aid North Korea’s development due to its limited economic resources and tremendous domestic challenges. Bilateral economic relations have been weak as a result. Russia’s tense relations with Western countries and UN sanctions against the DPRK further constrain Moscow’s economic presence in North Korea. Yanghyeon Jo looks at Japan-DPRK relations in Chapter 8. Japan was once an important trade partner and source of investment in North Korea, but the bilateral economic ties ceased after political relations deteriorated. Japan’s potential great contribution to North Korea’s economic development cannot be realized without the normalization of bilateral diplomatic relations, which is unlikely, given deadlocked talks over the abduction issue and North Korea’s incessant conduct of missile tests. The third part of the book examines the roles of international players in North Korea’s economic development. North Korea’s denuclearization is key for advancing its economy. The United States and European countries are critical in international organizations’ response to North Korea’s nuclear development. North Korea’s resistance to the pressure from the international community is also discussed. The evolving US policy toward North Korea and North Korea’s response to bypass the international sanctions are analyzed by Troy Stangarone in Chapter 9. The United States is the most important factor for the DPRK to undertake export-oriented economic development. At present, the most urgent issue for North Korea is removal of UN sanctions, which also depends much on its relations with the United States. The Trump-Kim

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meeting in Singapore brought hope for advancing bilateral relations; however, relations were ruined a year later. Antoine Bondaz evaluates Europe’s relations with North Korea, Europe-DPRK economic relations, and Europe’s adoption of sanctions against the DPRK in Chapter 10. Despite the EU’s limited weight in the DPRK’s economy, European countries have made great contribution to North Korea in terms of humanitarian aid and capacity building. Europe’s continuous assistance and efforts to engage North Korea provide important ground for the country’s future development and regional stability. In Chapter 11, Denny Roy elucidates the reasons behind North Korea’s active pursuit of nuclear weapons despite the pressure from the international community for denuclearization. Despite its small economic size visà-vis the greater powers in the region and isolation from the international community, the DPRK has been able to resist pressure over denuclearization and has successfully developed its own nuclear weapons. Roy identifies three unusual factors that helped North Korea to develop its nuclear power, including the regime’s extraordinary determination, its semi-isolation from the international community, and the South Korean capital city’s vulnerability to external attacks. In Chapter 12, Min-Hua Chiang illustrates how North Korea’s economy could have been sustained under UN sanctions. As the UN sanctions before 2016 focused on restricting arms deliveries to North Korea, the impact on the economy was not obvious. North Korea’s greater economic engagement with South Korea and later China through trade, FDI, and people-to-people exchange could have further helped the economy to grow and indirectly financed its military expenditure. Although North Korea’s economy suffered from greater inclusion of economic measures in the UN sanctions after 2017, its insistence on nuclear development indicates that the cost of abandoning its nuclear program, for the regime, is greater than its economic setbacks. Chapter 13 concludes the book by summarizing the arguments raised in the previous chapters. It also reflects on how North Korea’s economy can be better integrated into the region and the world, which is essential for the country’s economic development prospects. This concluding chapter further compares North Korea’s case with mainstream theories in international political economics with regard to economic development. Notes

1. “Democratic People’s Republic of Korea,” United Nations Statistics Division, https://data.un.org/en/iso/kp.html. 2. World Bank data derived from CEIC database, 2022, https://www.ceicdata .com/en.

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3. On the contrary, South Korea primarily inherited its modernized agricultural infrastructure from the Japanese. Schwekendiek, A Socioeconomic History of North Korea, 116–117. 4. Schwekendiek, A Socioeconomic History of North Korea, 118, 146. 5. Kim, Unveiling the North Korean Economy, 79. 6. Lankov, “The Resurgence of a Market Economy in North Korea.” 7. North Korea lacked reliable data on the national economy and the capacity to organize economic institutions based on a socialist framework. See Eberstadt, The North Korean Economy, 17–59. Beyond the geopolitical factors, North Korea would have to fix some fundamental problems in its domestic economic system before economic take-off could occur. First, the current tax system does not allow public saving to pass through the budget to increase public expenditure in the civilian economy. Second, its banking system has not adapted to the growing accumulation of private wealth. Due to corruption and black-market lending, the banking services are not widely trusted by the public. See Babson, “The North Korean Economic System,” 149–175. 8. Broome, Issues and Actors in the Global Political Economy, 244–245. 9. Haggard, Pathways from the Periphery, 13–14. 10. Gilpin, Global Political Economy, 330; Wade, “Wheels Within Wheels: Rethinking the Asian Crisis and the Asian Model,” 85–115. 11. Berger, The Battle for Asia, 37–42. 12. Ikenberry, “American Hegemony and East Asia Order,” 353. 13. Jorgenson, “Productivity and Economic Growth in Japan and the United States,” 217. 14. Ozawa explained that “macro-clustering” is a phenomenon in which hegemony generates growth stimuli for its closely aligned group of countries. The growth stimuli include the dissemination of technology, knowledge, skills, access to the hegemon’s home market, and institutional arrangements of open market capitalism. See Ozawa, “Pax Americana–Led Macro-Clustering and Flying-Geese-StyleCatch-Up in East Asia,” 701. 15. Wallerstein, “The Rise and Future Demise of the World Capitalist System,” 405; Wallerstein, The Modern World-System, 20–21. 16. Grier, “Section 301 of the 1974 Trade Act.” 17. US Department of the Treasury, “Major Foreign Holders of Treasury Securities.” 18. Beeson and Bell, “Structures, Institutions and Agency in the Models,” 116– 140. 19. Krugman, “The Myth of Asia’s Miracle,” 62–78. 20. O’Brien and Williams, Global Political Economy, 89. 21. “Socialism with Chinese Characteristics,” China Daily. 22. Miller, International Political Economy, 256. 23. Aslund, How Capitalism Was Built, 57–81. 24. Assa, “Transition Economies,” 1265–1266. 25. Gilpin, Global Political Economy, 334–336. 26. Andor, “Fifteen Years of Convergence,” 18–23. 27. Gorzelak, “The Eastern Horizon.” 28. Jandl, Vietnam in the Global Economy, 265–266. 29. Lim, Economic Growth and Employment in Vietnam, 158. 30. Beyond the collapse of the Soviet Union, insufficient agricultural production due to bad weather conditions, continued high military expenditure, and reduction of food rations were important factors in the hunger disaster in the 1990s. See

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Noland, “North Korea in Global Perspective,” 71; Kim, Unveiling the North Korean Economy, 47–49. 31. Lankov, “The Resurgence of a Market Economy in North Korea.” 32. Hong, North Korean Economy in the Kim Jong-un Regime, 9. 33. North Korea viewed the attempts of Stalin’s successor, Nikita Khrushchev, to reform as revisionist. Moreover, conflict between the Soviet Union and China compelled North Korea to adopt a more balanced stance between the two countries. Kim, Unveiling the North Korean Economy, 43. 34. Schwekendiek, A Socioeconomic History of North Korea, 147. 35. Lee, “A Note on Economic Development in North Korea,” 1–13. 36. Ku, “North Korean Economy,” 130–150. 37. Mah, “Patterns of International Trade and the Industrial-Led Economic Development of North Korea,” 820–834. 38. Ku, “North Korean Economy,” 130–150. 39. Park, “The Political Economy of Economic Reform in North Korea,” 529–549. 40. Kong, “The Political Obstacles to Economic Reform in North Korea,” 73–96. 41. Ballod, “Political Economy of East Asia Economic Zones.” 42. Hale, “Real Reform in North Korea?,” 823–842. 43. Park, “Regime Change in North Korea?,” 23–45. 44. Kong, “The Advance of Marketization in North Korea,” 830–867. 45. Lankov, The Real North Korea, 111. 46. Lee, Kim, and Lee, “The Possibility of Economic Reform in North Korea,” 279–294; McKay, “How Significant and Effective Are North Korea’s Market Reforms?,” 83–97. 47. Habib, “The Enforcement Problem in Resolution 2094,” 5–68. 48. Hong, North Korean Economy in the Kim Jong-un Regime, 19–20. 49. Killalea, “North Korea Is Sitting on $6 Trillion in Mineral Resources.” 50. However, the supply of cheap labor may not be sustainable. North Korea’s median age (34) is higher than that of Southeast Asia (28.5). When Vietnam and China embarked on reforms, their median ages were about 20. World Population Aging, United Nations, 2017, 30; “Is North Korea the Next Vietnam?” The Economist. 51. United Nations Educational, Scientific, and Cultural Organization (UNESCO), “Literacy Rates Rise from One Generation to Next, but Challenges Remain in Region.”

2 A Self-Reliance Economy Under Kim II Sung William B. Brown

It often seems we most want what we can’t have. Such is the case with Kim Il Sung’s doctrine of self-reliance, or juche in the Korean vernacular, which he first presented in December 1955 as the country was climbing out of the Korean War catastrophe.1 The Democratic People’s Republic of Korea (DPRK) is hardly self-reliant in its economy and never has been, but this has been the consistent aspiration of the three generations of Kims who have ruled the country for seventy-five years. It’s something we all like in the abstract but can’t afford in reality. It goes against what we have learned about economics; indeed, it contradicts the division of labor, specialization, and trade that our high living standards rely upon. When you think about it, it even contradicts socialism, the supposed ideology of North Korea’s economic and political system. Soviet advisors recognized this early in Kim Il Sung’s rule and protested strongly, less so the Chinese who were trying to pry him away from his Soviet backers. But for a country trapped by its geography and history between four of the largest economic powers in the world—China, Japan, Russia, and the United States—and an archrival and highly successful South Korea that has massively integrated with the world economy, it may be all but inevitable. In fact, rival South Korea’s emergence as the counterpoint, a well-integrated modern economy with its own sense of identity, only adds fuel to the Kims’ fire of self-reliance. South Koreans may be richer, but they aren’t very Korean anymore, or that’s the party line. Many in the North might believe this, but we wonder for how long. Soviet ambassador V. I. Ivanov, in a cable to Moscow during a pivotal 1956 party plenum that set forth Kim’s post–Korean War trajectory,

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aptly marks the Soviets’ frustration with their protégé, whom they had saved from sure defeat in the Korean War and for whom they were providing billions of dollars in aid to rebuild his economy. “Korea does not give up on establishing a closed-door economy and gives little attention to strengthening the connection among socialist bloc countries and forming the division of labor.” Soviet historians were probably comparing Kim to the conservative “Taewongun,” the queen’s regent several generations earlier who held off modernization and made the country ripe for Japanese colonialization.2 The Russian and Chinese embassies in Pyongyang probably draft the same kind of cables today, reflecting Kim’s grandson’s determination to do things his own way. And former president Donald Trump may feel the same frustrations. Why can’t Kim Jong Un accept the obvious and make choices that would both improve his internal and external security and make his countrymen more prosperous? Is earning a credit card somehow less selfreliant than begging for food? Is pointing self-made nuclear-armed missiles at a superpower really the best way to secure the country? A Soviet diplomat in Pyongyang, a comrade Yulin, in 1959 put it another way in a then classified conversation he had with the Hungarian embassy, also relayed by embassy cable. After complaining that Pyongyang was meeting just over half of its export commitments for the year, he said most of North Korea’s problems were due to “the exaggerated national pride of the Korean people,” which led them into making unrealistic plans and prevented them from asking for advice. He cited a long conversation in Moscow during which Premier Nikita Khrushchev had admonished Kim for the unrealistic goals of the first five-year plan (1957–1961) and specifically for Kim’s insistence on making farm tractors instead of importing them. Khrushchev is said to have told Kim one can’t expect such results from just the enthusiasm of the workers.3 About the same time, the Chinese were arguing much the same, though perhaps more diplomatically. Chinese trade officials, after hearing an economic analysis of the upcoming five-year plan given by a visiting North Korean delegation in 1957, told the visitors that based on Chinese experiences, they suggested (1) that North Korea consider raising the percentage of investment given to agriculture from the low 5.7 percent stipulated in the plan; (2) that planning should not aim too high—it was better to aim low and overachieve; and (3) that much attention should be paid to raising living standards.4 Kim never took their advice, and seventy years later these communist stalwarts are long gone, as is the Soviet Union; yet Kim’s grandson still rules in Pyongyang. Just what was this system, and how have the Koreans adjusted to and lived and died with it?

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We often use the terms centrally planned, Marxist, socialist, and simply nonmarket to describe North Korea’s economy in the Kim Il Sung era. The most important feature is collective or state ownership of the “means of production,” what we call capital, and this is largely retained to this day. A more precise term is a command economy system, as defined by Gregory Grossman and Janos Kornai and as explained by Kim Byung Yeon in his “Unveiling the North Korean Economy: Collapse and Transition.”5 Even better is to use the adjective administrative, giving insight into how this command system is managed. Not quite as authoritarian as it might sound, the plan is administered by many levels of authorities and tens of thousands of “people’s committees,” all trying to adhere to a unifying plan concept without the use money, or, more importantly, prices that reflect supply-anddemand conditions, to guide them. The concept is easiest to define by what it is not. It is the opposite of a free market system in which disaggregated autonomous forces of supply and demand, working through a flexible price system, determine the goods and services an economy produces, how many, and how these are distributed—the “invisible hand” of Adam Smith. Instead, a very visible “government fist” dictates these decisions, making sure that money, prices, and markets play little role. Ration tickets take the place of money, and whoever controls the tickets, usually the workplace and neighborhood Worker’s Party bosses, has ultimate power over whether and what you get for your lunch. North Korea is the only remaining such national economy in the world, and it is much changed from the Kim Il Sung generation, but in its heyday, from the 1950s through the 1970s, about a third of the world—the Soviet bloc and China and a few “satellites,” such as Cuba and North Korea—used the system. As developed by Vladimir Lenin in the Soviet Union, the command economy approach reflected the distrust that Karl Marx and his followers had of labor and capital markets and the capitalist ownership system, which they claimed overvalued capital and undervalued labor, this in a time and place where capital was nearly nonexistent and labor and land the dominant factors of production. They understood that savings—or accumulation, as they called it—and the creation of capital through investment were necessary for growth, but they did not want such capital to be priced high in relation to labor, arguing that this would make the few owners, the capitalists, rich, and they would use that wealth, or power, to enslave a worker class, keeping them poor. Their Marxist solution is rational in a perverse way, especially as strong monopoly tendencies in industry are confronted, but the planning solution turns out to be incredibly complicated and ultimately catastrophically inefficient. Instead

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of monopoly capitalists, it created state monopolists and bureaucrats with even greater power and with much less incentive to use resources efficiently than even the biggest private “comprador” capitalists. For starters, all means of production, including farmland, machinery, infrastructure, and even human capital, was supposed to be owned by the state or collectively by large groups of people. Private trade in capital was disallowed, and interest on private savings was deemed to be zero—money should not earn money. Strictly speaking, money in a classical sense—as a vehicle of transactions, a unit of measure or numéraire, and, most importantly, a store of value—was not needed or even allowed. All economic decisions were made by the state and its many bureaucratic authorities and by its “people’s committees.” To achieve economic growth, in the classical school of economics of which Marxism is a part, an investible surplus of production over consumption was required. So the state ordered the maximal production of capital goods and limited the production, and thus the supply, of consumer goods to bare necessity. A forced savings system generated a lot of capital stock—in other words, lots of factories and machinery—but not enough food, heat and water for homes, services of all kinds, or decent housing. The Marxist solution, moreover, nearly ignores the development of the service sector, an increasingly important part of any country’s economy as wealth is generated and citizens want more than simple material goods. The Soviet system was made plausible, if not practical, by the invention of huge multidimensional input-output matrixes, driven by complex linear algebraic algorithms, in which bureaucrats administratively replaced the self-sustaining price and profit system with coefficients that dictated how much of every input was needed for any output. Modern computers would have helped. Click in the desired product, say 2 million tons of rice, and the equations would spit out the amounts of labor, land, fertilizer, machinery, electricity, petroleum, and many other inputs needed for that output. Orders would be handed out to state-owned factories and farms through five-year plans for that production. Coefficients in the equations could determine their relative opportunity cost prices, the trade-offs between, say, more coal or more petroleum. There were literally thousands of products and tens of thousands of inputs. The Soviets were good at this sort of thing, and it worked to a degree. Enormous quantities of capital stock and huge factories, usually copied from the capitalist economies, were built, and industry seemed to flourish. Lots of steel could be made in this way, as could sedans, if they were black. White sedans would require a few thousand more equations, so were excised from the plan. With the emphasis on capital goods, output of consumption goods lagged, and when anything went wrong, the people suffered, starved, and eventually revolted. Except in North Korea.

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Korean-Style Marxism There are no longer any Karl Marx streets in Pyongyang or other Korean cities—the names were changed in 1956—but understanding the remarkably quick and complete conversion of northern Korea from conservative Confucianism as a Japanese colony to revolutionary Marxism/Leninism may help us understand how it might rid itself of that ideology. It would have to rethink capitalism, the private ownership and trading of capital, much as did China’s Deng Xiaoping Kim’s idea of juche, which he formulated to gain ideological distance from the suffocating imperialism of the Soviet Union and China— which Kim often referred to as “big power chauvinism”—might even be used to normalize the country’s integration back into the broad global economy.6 The juche idea, though translated as self-reliance, was not autarky, as some portray North Korea today. Kim recognized the need to import petroleum, coking coal, rubber, and some agricultural goods, such as cotton, cane sugar, and tobacco, and he understood the need to export, especially nonferrous metals, iron ore, and anthracite coal, to pay for them. He said in his writings that he thought at least 60 to 70 percent of industrial inputs should be domestically produced and the remainder imported, even from the capitalist countries, although he admitted that the latter must be done with care. Kim argued for learning from the outside, everything from building a refinery tower to conducting nuclear research to developing petrochemicals, which he said the country had not mastered. “We are opposed to flunkeyism and dogmatism but that does not mean we should isolate our country as the Regent Taewongun did.”7 Or, one is tempted to add, as his son and grandson managed to do with their insistence on acquiring nuclear weapons and the embargoes that came with them. Taking the “means of production” from private to collective or state ownership in Soviet Russia and in Mao Tse-tung’s China was overwhelmingly a revolutionary event, with millions of property owners, large and small, killed or expelled and the economies thrown into chaos, creating massive famines as the state blindly focused on heavy industries, especially steel, that fit the model of a command economy. In contrast, as Kim Il Sung and his Soviet supervisors birthed the DPRK in 1945, no such revolution was needed. Most capital assets and farmland had been abandoned by fleeing Japanese and “bourgeois” Korean landowners and capitalists, the latter fearful of what they already knew about Stalinist takeovers. There had been no war in Korea, just a change in ownership. As much as 90 percent of the country’s capital stock had been developed by the Imperial Japanese government and private business during the colonial period (1910–1945), almost entirely in the northern half of the peninsula. All of this was abandoned by its owners as hundreds of thousands of Soviet troops, armed with US lend-lease weapons, marched into

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northern Korea upon Tokyo’s sudden surrender to Washington in August 1945. A total of 1,043 factories were taken over by the Russian army and its communist proteges, led by one of their young leaders, Kim Il Sung.8 These included one of the largest steel mills in Asia, Mitsubishi’s iron works in Chongjin, now Kimchaek Iron and Steel; the Musan open-pit iron ore mine that still feeds the works, also one of the largest in Asia; the Noguchi nitrogenous fertilizer (and munitions) plant, one of the largest in the world, in Hamhung, fed by a complex tunneled hydropower system and large amounts of lignite coal; some of the larger deposits of zinc, lead, graphite, and magnesite in the world; an American-developed gold mine; an extensive hydroelectric power system, including the largest hydropower dam in Asia, Supung, on the Yalu river shared with China; many chemical plants in the heavily industrialized Hamhung area that had been built outside the reach of US bombing of the Japanese islands; and many munitions plants built for the same reason. Modern government-owned trunk railroads, connecting with China and, via the trans-Siberian railway, all the way through to Europe, as well as an extensive electric power grid and all the local utilities and irrigation systems, suddenly fell into the laps of the new communist authorities even before they had formally set up the DPRK government. State takeover of private capital was thus never an issue. As stated by Robert Scalapino and Chong-Sik Lee in their epic Communism in Korea, “[In 1945] few if any emerging states in the post-war period had a ‘capitalist’ class as weak and insignificant.”9 It is not that this class had not previously existed. It had just fled in fear of Stalin and a badly behaving Soviet occupation army.10 Land to the Tillers, Then to the Collectives Most farmland and real property was also taken by the new state, given to the tenants, and then collectivized on a timetable that surprised even the Soviets. The first law passed by the new Korean communists, probably drafted by their Soviet advisors, in March 1946 was a huge land-reform act, redistributing about half the cultivated land of the country to 750,000 former tenants.11 Again, this was made relatively easy by the withdrawal of Japanese owners and the flight of hundreds of thousands of middle and large landlords to southern Korea. Overnight, northern Korea shifted from a largely tenant farm system, with about half the farmers owning small bits of land and working larger plots for the village landlords, to a largely owner-operated system with a million small farms. Article 1 of the act stipulated that the land was to be owned privately by the farmers in perpetuity, but it could not be rented or sold. Such trade in the “means of production” was presumably too capitalistic and might lead to new major landlords.

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The state took about 25 percent of grain production in tax, about the same take as the landlords had exercised, allowing farmers to sell their produce in the ancient market towns and to the state for distribution in the cities, albeit all at state-controlled and -set prices.12 These reforms were not unlike those the US occupation authorities imposed on South Korea, Japan, and Taiwan at about the same time, a widely underappreciated “land to the tillers” movement that created millions of little capitalists.13 China’s Mao Tse-tung followed suit as soon as he won his civil war. A big difference was that under Kim and later with Mao, North Korea’s private owners were not compensated for their land. Kim was proud of this fact; in 1965 he wrote, “We freed the productive forces in agriculture from their feudal shackles and emancipated the peasants from exploitation and enslavement by the landlords by carrying out agrarian reform in a draconian manner—confiscating the landlords’ land without compensation and distributing it among the peasants at no cost.”14 At least his “draconian” wasn’t as murderous as Mao’s in China. Exact numbers are not available, but estimates put the number of people who moved south at around 800,000 before the Korean War and probably 1 million or more during the war, many of whom would have been classed as capitalists or landlords.15 The reasons for such a huge migration are easy to understand given the release of classified Soviet-era documents that describe the Soviet army’s horrific behavior in late 1945 as it took occupancy of the country from the defeated Japanese. In the ensuing months, economic chaos erupted as the troops stole Korean property wherever they could find it and badly treated the native population. A scathing classified Soviet report of the situation in three North Korean provinces in December 1945, drafted by a Lieutenant Colonel Federov for his commanding officer, a Lieutenant General Kalashnikov, in the Soviet Far East, put it starkly: “Immoral behavior by servicemen which tarnishes the honor and dignity of our army and country has taken on truly catastrophic dimensions in Korea.”16 He described pervasive bad behavior in Korea by the entire Soviet army, from its top leadership down, including rape, theft, murder, and the taking of wartime “booty” from Korean farms and factories. War “booty” was defined as all vehicles and railcars and even, as mentioned by Scalapino and Lee, the turbine generator units of the huge Yalu river Supung hydropower plant. The Soviet army had taken charge of every district or county but was hopelessly deficient in translators or knowledge of the country and struggled to control its own soldiers, let alone get factories working, as Japanese managers and technicians were turned into helpless refugees streaming into Pyongyang. “Let them die” was a phrase used by one Soviet commander. Another commanding general said, “Let half the Koreans die” if they revolt. Federov reported that factories in his area had all stopped operating, including the all-important Hungnam fertilizer plant.

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Prices, paid using Japanese money and Soviet script, were soaring, making some of the “capitalists” rich but the peasants and workers, whose wages had already been fixed, destitute. He cabled in coded text, Most factories, mills, and mines are idle. Workers are become declassed. Mineworkers, for example, in the districts of Sainei (Hwanghae-do Province) and Gilju (North Pyeongan Province) are starving and scattering. (By the way, rare and very valuable ore is mined in the mines of the district of Gilju: uranium, tantalum, and beryllium). The largest metallurgical plant in the city of Haeju [Kaisyu] stands idle because of a lack of a market for the finished product. The plant is supplied with reserves of raw material, ore and coal, created back during the time of the Japanese but is not able to operate. Wages for employed manual laborers and white-collar workers are extraordinarily low. They have been set at the previous level by order of our command, that is, those which existed before the Red Army arrived, but in view of the increase in prices they do not provide a living wage. The situation of the rural population, especially the tenant masses (comprising up to 70 percent of all peasants), which had noticeably improved at first in connection with the 40 percent reduction of the rent payment to the landowner and the rise in food prices, is now beginning to worsen. The reason is the grain purchases being conducted by order of our command.17

And this was all a situation of the Soviets’ own making. There had been no war in Korea, and the country had been “liberated” from an oppressive Japanese rule by the distant Americans. Federov saw no sign of “communist” or revolutionary thought in the farming or working populations, only among Kim Il Sung’s party people, who were fanning out into the districts. Even land reform was not well considered, Federov said, since the Korean peasants did not seem interested in throwing out the landlords. As in Mao’s China, this “land to the tillers” movement didn’t last long. Kim’s attention quickly turned to war preparations and heavy industry, so the loss of farm managers, the lack of fertilizer and other inputs, and soon thereafter the Korean War meant bad harvests and devastating national hunger if not famine. After considerable political postwar debate about the role of private farming, by 1956 the issue was settled, and Kim moved to quickly fulfill the longer-range communist objective of ending private ownership and socializing agriculture, amalgamating the small family plots into large collectives. By 1958, only twelve years after the defeat and removal of the Japanese rulers, all private holdings had been collectivized or turned into state farms, mostly specialized orchards and the like, where farmers worked as employees. Farmers, usually the wives, could grow their own vegetables on tiny private plots around their houses and sell the output in marginalized farmer’s markets; otherwise, the “tillers of the land” lost all independence. After the state took its large share, the grain—almost always rice or corn and later potatoes—was divided up and redistributed to farmers in a complex

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work-point system. “To each according to their work” was the dictum, not yet “to each according to their need,” the goal of eventual communism. The farmers could not move to towns or cities but, like medieval serfs, had to stay where they were, with the exception of young men doing their ten years of military duty. With some changes in the size of work teams and the quotas above which output can be sold in the markets, this system remains in place to this day, with farmers still comprising about a third of the workforce and struggling to feed themselves, let alone the urban population. Kim Il Sung’s central plans after 1954 are shown in Table 2.1. An important unanswered question is how devoted Kim was to the revolutionary collectivization idea, given it wasn’t a high priority until 1956, well after all industry had been socialized. In a conversation in Moscow, probably in 1950, just before the Korean War, Stalin asked Kim whether the land was going to be collectivized. Kim responded that he couldn’t do so yet since the country hadn’t been unified—he was preparing for war and could not afford to risk the ire of the peasants. Stalin went on to say not to hurry, that collectivization could wait, and asked about the status of state farms. Kim responded that a few of these existed, and they wanted to develop more from tidal reclamation projects, asking for equipment to help.18 In a conversation with China’s leadership in 1958 after collectivization was complete, Kim described the rationale in terms of economic efficiency rather than Marxist ideology, noting that farms averaging 300 households or multiple villages could be more productive, making better use of tractors, chemical inputs, and irrigation. And decades later, in a 1972 conversation

Table 2.1 Kim-Era Central Plans, 1954–1993

Three-Year Plan First Five-Year Plan

1954–1957 Rebuilding. 1957–1961 Heavy industry and complete socialization of agriculture and enterprises. Completed one year early. First Seven-Year Plan 1961–1967 Generally failed to achieve ambitious goals. Three-Year Plan 1967–1970 Military modernization. Six-Year Plan 1971–1976 Missed goals. Industrial output said to rise 1.7 to 1.8 times. Opened trade. Romanian embassy in 1972 reported that the plan was failing due to rising military spending that was causing a shortage of workers.a Extension 1977 Gap year to finish six-year plan. Second Seven-Year Plan 1978–1984 Ambitious goals not met. Industrial output said to rise by 110 percent. Extension 1985–1986 Priority on energy sector. Third Seven-Year Plan 1987–1993 Goals not achieved due to collapse of Soviet Union and other problems.

Source: Noland, Avoiding the Apocalypse, 66, as updated from Kuark, A Comparative Study of Foreign Trade in North and South Korea, Table 2-1. Note: a. “Telegram from Pyongyang to Bucharest, SECRET, no. 061.005, Urgent,” History and Public Policy Program Digital Archive.

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with South Korean spymaster Lee Hu Rak in Pyongyang, in which Kim conveniently argued North Korean–style socialism wasn’t the kind of threat to South Korea’s capitalism that Lee was making it out to be, Kim described the choice to collectivize as spontaneous and practical, given turmoil on the farms after the devastation of the war.19 In truth, farmers were not necessarily forced to give up their land rights; rather, state control of inputs and price controls that limited private profits, the state’s takeover of irrigation systems necessary for rice farming, and prohibitions against selling land had made private farms financially infeasible.20 Had he lived through the 1990s famine, one wonders if Kim would have rethought the practicality of collectivization, as Deng Xiaoping did in late-1970s China. His son and grandson have tinkered with smaller work teams and expanded markets, acknowledging the “food problem” of the country, but collective farming still dominates North Korea’s agriculture and still accounts for a third of the workforce, dragging down overall national productivity and incomes and making the threat of a new famine always just over the horizon.21 Industry: North Korea’s Perceived Comparative Advantage With large export-oriented modern factories laid vacant by the departing Japanese, it made sense for Kim and the Workers’ Party to focus on industry, not agriculture, once the farmland had been given to the peasants.22 This also gave Kim impetus to dispute the Soviet notion that a primitive North Korea was not ready for the socialist revolution since it lacked an industrial worker class, a similar argument the Soviets were making about Mao’s China. Like Mao, Kim wanted to move directly from medieval feudalism to modern socialism in one quick jump. Japan had developed northern Korea as a source of raw materials and industrial supplies toward incorporation of Manchuria and much of China into the empire’s World War II–era “Greater East Asia Co-Prosperity Sphere.”23 With the abrupt withdrawal of the Japanese, the new authorities promptly nationalized the entire lot, even before the formal creation of the state, but production collapsed as managers and technicians left the country, and much effort was expended getting these factories back in operation. As predicted by Lieutenant Colonel Federov, 1946 was an extremely difficult year for the economy, with people facing famine, but it bounced back quickly in the years prior to the 1950 Korean War, as discipline was restored to the factories and as Soviet aid and control improved. Even Supung’s hydroelectric turbine generators were returned. Especially important in the Soviet-led planning were the mining and metallurgical sectors, electric power, and chemicals, which would form the base of a newly industrialized country and could easily be integrated with the bloc countries.24 Private handicraft and small consumer-

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product enterprises were left alone, but these accounted for only about 10 percent of industrial production. By 1949, industrial output as measured by the regime had surpassed the 1939 preliberation peak. In contrast to the agricultural sector, which at that point the regime figured was only 3 percent socialized, industry already was 90.7 percent owned by the state. Ten years later, given a big push after the Korean War, both agriculture and industry were 99.9 percent socialist—that is, owned by the state and the collectives. In little more than a decade, North Korea had indeed led the communist countries into full-fledged socialism with almost all industry and agriculture under state or collective ownership.25 The Korean War (1950–1953) devastated North Korea as US aerial bombing took aim, with hundreds of thousands of bombs, at key industries and infrastructure during the long period of stalemate along the 38th parallel as armistice negotiations lagged on and as Chinese troops continued to threaten, attack, and even occupy Seoul. North Korean data show industrial output plummeted by 40 percent in the war years, and if anything, that seems understated.26 Electric power, for example, was nearly completely shut down. Reconstruction, including billions of dollars of aid from the Soviet Union, China, and Eastern Europe, especially East Germany, quickly rebuilt industry on a similar scale to what had existed and then expanded it. The Soviets, clearly in charge of the economy, laid out a one-third division of labor between itself, Eastern Europe, and China.27 China’s contribution was mainly manpower supplied by the People’s Volunteer Army: nine divisions, comprising several hundred thousand young men, who stayed in North Korea until 1958 doing infrastructure work. The Soviet Union supplied vast industrial supplies and materials, and Eastern Europe surprisingly ponied up about a third of the support. East Germany, for example, took responsibility for rebuilding the industrial city of Hamhung, including the large fertilizer and other chemical plants. But Kim’s own rebuilding campaign itself was extraordinary. Pyongyang city, which also had been virtually destroyed, was built back in only one year to take the shape it now retains. The bloc country embassies called it “Pyongyang speed,” for the new five-year plan (1957–1961). Rebar and plumbing might have been left out, and there was no wood, but the concrete city quickly looked impressive in the Soviet style, with wide avenues and plazas replacing the crooked medieval streets. Seoul, in contrast, lay devastated for a decade. (Interestingly, Kim Jong Un’s regime renewed the use of the term Pyongyang Speed for current urban housing projects.) While the conversion of the conservative society to socialist ownership had gone relatively smoothly, as did reconstruction from the war, managing the new “command” economy proved anything but easy for the Kim government.28 Early in his rule Kim may have become dissatisfied with the Soviet-style planning and the inevitable input shortages, with no automatic

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price adjustments to incentivize production and usage, the levers of supply and demand. The Soviets and the Chinese argued not to push the plans too hard, no doubt having learned from experience, but Kim wouldn’t accept cautious plans and failed to correct the problems incomplete planning caused, instead always trying to exhort workers and farmers to work harder to fill gaps, not for themselves but for the nation.29 His solution always seemed to be to “aim higher,” while the Soviets kept arguing for lower and more obtainable targets. In a carefully designed planned economy, missed targets have major follow-on and even cascading repercussions. Time and again in his speeches and in diplomatic conversations with Soviet, Chinese, and East European diplomats, he voiced his concerns with his State Planning Commission, one of the most important units in his government, even as industrialization grew rapidly. A major problem was shortages or gaps in industrial inputs that would shut down a factory for lack of a simple part and the great piles of paperwork needed for every transaction.30 In a remarkably cogent description of the planning problem in a set of speeches given in 1965, he described the vital role of the planning commission and what he frankly described as the poor job it was doing. He laid out clearly the fundamental issue in economic growth theory: the amount an economy should spend for current consumption and the share it should spend for investment in the future. Apologetically it seems, he said he must weigh heavily on the investment side, and within that, investment in heavy industry, not agriculture or infrastructure. People’s livelihood, or consumption, necessarily but sadly, came up last in his calculations, given the nation’s external enemies. But soon, he promised, with so much investment, production would rise to the level of Japan, much as Nikita Khrushchev was then promising to raise Soviet living standards to US levels.31 Amid this optimism, a glimpse of the dark future that would cloud his economic legacy, the “great famine” that loomed as he lay dying in 1994, came in a conversation with Chinese premier Zhou Enlai in 1958 in Beijing, a high point in both countries’ economic emergence from early- and mid-decade debacles. Boasting of the annual double-digit growth of industry—production which at that point vastly exceeded China’s on a per capita basis, even as a hungry China was donating hundreds of thousands of tons of grain to a far richer North Korea—Kim admitted that his main problem was that the people still lived very poorly, a point East European and Soviet diplomats often made in their cables back home. An industrious and disciplined people working and living in truly dismal conditions, building not eating, might have been their conclusion. Premier Zhou, whose citizens had already suffered one of the world’s worst famines (the result of collectivization in the early 1950s) and would soon be embarking on another (the result of Mao’s “Great Leap Forward”) told Kim simply that China should give more thought to the “hard work” of the Korean people. The productivity of

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that work, the bane of the socialist planners, however, was lost on Kim and his planners.32 Incomplete Planning: Chinese and Soviets Fill the Gaps Kim’s knowledge of central planning was not limited to macroeconomic linkages between saving and investing. In his extensive writings and speeches and his “on the spot guidance,” he dug down and understood at a micro level the decisions his planners must make for the thousands of enterprises under their purview. In a speech complaining about “bureaucracy” in 1965, for example, he berated the Chemical and Metallurgical Ministry for faulty planning: “Drawing up an accurate plan is a most important thing in socialist economic construction. Under the socialist system all the country’s economic activities are conducted according to a unified state plan. That is why a clear-cut plan constitutes the first requirement for economic development.”33 After expressing consternation that only sixteen planners had spent two weeks formulating the annual plans for twenty-four factories under the chemicals ministry, he said, “More than half the ministry’s workers must be involved in formulating the annual plan.”34 Similarly, in berating managers at the Hwanghae iron works for missing their pig iron target, he explained that this caused workers at the nearby Kangson steelworks to sit idly with nothing to do, creating a cascading series of problems in the rest of the economy that needed steel.35 Details of the plans aren’t available, but it seems as though the planning commission offered up only skeleton plans that gave targets for higher-level semifinished products (e.g., steel) and allocated inputs such as electricity but lacked the detail to provide all the supporting inputs, such as iron ore and pig iron. Some compare this to South Korea’s indicative planning of the Park Chung Hee era or the French system of planning, but that misses the mark. South Korea’s plans guided sectoral investment, using preferential bank loans and export licenses, but it was surrounded, overwhelmed by the domestic and international markets, which generated the prices and wages that would signal over- or undersupply and provide a reward for risk taking and a penalty for failure. If there was a shortage of steel, the price would rise, usage would automatically be constricted, and more would be made. North Korea had no such markets or prices to fall back on. If a generator wasn’t in the plan, it couldn’t be made or supplied, except as donated by a Soviet or Chinese benefactor. As Kim Byung Yeon concludes in his extensive study of the North Korean and Soviet command economies, shortages of inputs are endemic and crush the productivity of labor and capital, offsetting in large part their concentration on investment

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at the expense of consumption.36 Soviet and Chinese advisors knew this, and complaining of constant requests for immediate aid deliveries, they often told Kim he was pushing too hard, with no room for error in an errorprone system. The cable summaries of Kim’s diplomatic conversations with Chinese and Soviet leaders are impressive in their detail—showing Kim’s command of industrial processes and data and an accurate understanding of his country’s shortcomings—but not in offered solutions. In contrast to his deep understanding of central planning, Kim’s main shortcoming in economic policymaking seems to have been a lack of understanding of prices and the incentives and information provided by the rival market system, parts of which even a slowly reforming Soviet Union and China were already adopting to fill the planning gaps. Lack of attention to prices—and in fact anything having to do with domestic money—is one of the more curious and ultimately disastrous failings of Kim Il Sung and his government. A well-working communist or command economy system would not need money, but Kim often pointed out in his writings and speeches that North Korea was not yet communist and not close to being well working and that money would circulate in tandem with rations. As with agricultural privatization, it may not have started out this way. As early as 1946 the first bank, Peasant’s Bank, was established, using currency left in circulation when the Japanese left, and it seemed to be aimed at working like a normal bank for farmers. Whether this was intentional or just reflected the need to fund the farmers’ preparations for the first harvest after the land reform is not clear. The ideas behind it seem completely capitalist, not in keeping with the command system that was already beginning to work in industry and in the urban areas. Soviet military script also circulated along with the leftover yen as money. Inflation soon followed, leading to the formation of the Chosen Bank, which replaced both types of money with a new currency, the Chosen or Korean won, removing the use of yen or Soviet script.37 Prices were forced down by tight controls, industrial and state wages were fixed at low levels, and consumer necessities were mostly distributed by rations, including housing and food, the largest shares of anyone’s normal consumption budget. Money increasingly and surprisingly became unimportant. As long as the state could supply the rations, small as they were, money was pushed out of circulation. Again, one wonders how much these fundamental decisions regarding capitalism and the monetary system were due to Kim and the ideology of the Workers’ Party or to practical problems in trying to control a budget with large military requirements as the party began preparations for the war that soon followed. Immediately following the war, at the important Sixth Plenum of the Workers’ Party in August 1953, which set up the reconstruction of the country, a debate ensued in which some advocated abolishing the ration system and turning back to markets and money. A

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fateful decision left the ration system in place, although with somewhat higher fixed wages and lower prices.38 And four years later, a North Korean delegation to Moscow in late 1957 said that by the end of the new fiveyear plan, the ration card system would be abolished, according to a cable from the Polish embassy in Pyongyang.39 But this never happened. Kim’s own views are not known, but it does not appear that he ever revisited the 1953–1954 decision. This dual ration-plus-money system continued during all of Kim’s tenure and continues to this day, although in recent years the money portion has greatly outstripped the socialist ration, except in industry. In his many economic speeches and writings, however, Kim rarely spoke of it or of price levels or wages. In a rare exception, in a 1965 writing he said that household income must rise to 100 won per month by the original end target of the Seventh Five-Year Plan (1967), and that level could only be achieved if housewives did work outside their homes in informal workplaces. He had hoped for a 35 percent increase in wage levels during that plan, but this was impossible due to external problems: the need to compete with an invigorated South Korea.40 The wages were not so important since most food and housing and some clothing were strictly rationed for the entire population at minimal prices. But markets, mostly quasi-legal, existed for most products and services at much higher, flexible prices. Officially in the 1960s, salaries were earned at a fixed scale from about 40 won per month for day labor to 170 won for a college professor. This could overstate the degree of inequality, however, since the bulk of one’s consumption was ration driven. A fourperson family might have an income averaging about 100 won a month, which they could use in state-managed markets. According to refugee interviews, typically, the largest expenses were for extra food beyond the simple grain rations and the spare clothing and shoes that were provided by work units. Housing, medical support, and education were nearly free but of poor quality. If some savings could be accrued, the money could be deposited only in the central bank’s local branch offices and withdrawn only for special reasons and with little interest. The population thus had no real financial savings to fall back on and could not obtain credit for any purpose. Money was important at the margin in distinguishing who could purchase a nice watch or warmer clothing but not much else. For a control-obsessed regime, this system had a huge benefit in that the money didn’t have enough buying power to bribe officials or allow travel—there were few restaurants or inns even if one could get a rationed train ticket—or purchase any luxury. In a huge show of power, such perks were given out by the regime, determining who got to live in Pyongyang, who had better apartments, and who got “gifts” from the Great Leader. This, probably more than the police state, enabled a very tight hold on the population.

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Successes, but Ultimate Failure A remarkable set of then confidential diplomatic cables from Soviet, East European, and Chinese embassies in Pyongyang in the late 1950s and early 1960s give a comprehensive and likely fair assessment of Kim’s economic successes and failures.41 They portray Kim, in the middle of his reign, as headstrong and supremely confident but also honest and knowledgeable about the economy’s shortcomings. He chafed at perceived slights from Mao and Khrushchev but managed to fend them off in a brilliant manner, getting what he needed from both. In 1956, for example, Soviet vice premier Anastas Mikoyan, back from a trip to Pyongyang to protest a Korean Workers’ Party purge of pro-Soviet and pro-China cadres, said that Kim’s five-year plan was far too ambitious; he wrote, “We should tell them frankly that they should pay back the debt and interest.”42 But quickly Kim patched things up with Beijing and received a large endorsement for the plan and much aid.43 And with that endorsement in hand, Khrushchev changed tack and decided to give Kim everything he wanted, “letting him learn from his own mistakes.” A smart and calculating person with a good sense of the complexity of the command economic system, but with little understanding about how a normal market economy works, Kim was a victim, no doubt, of his Stalinist upbringing. And Kim was never reticent about asking for more aid, then thanking his patrons again and again for their essential help, but privately, never in public.44 The documents show the Soviets as guiding the full-fledged development and then redevelopment of North Korea after the war, funded in roughly equal parts by Eastern Europe, China, and the USSR. The efforts worked, at least in industry. Industrial output quickly surpassed the 1949 prewar peak and grew at a double-digit rate through the mid-1960s. The Central Intelligence Agency (CIA) estimated that by 1965, gross national product (GNP) had risen to about $4.6 billion, on its way to $10 billion in 1975 at 1975 prices. Per capita income was about $375, growing to $590 during the same ten-year period. In contrast, South Korean GNP was $6.9 billion in 1965, growing to $21.6 billion in 1975, but as South Korea had twice the population, its per capita output was much lower than the North’s throughout the 1960s. This estimated data is sometimes used to say North Korea’s living standards were better than the South’s up to the mid-1970s. But that is likely not the case. Well over half of North Korea’s output was used for investment and military spending, with consumption barely at a subsistence level. South Korea spent a much larger share on consumption, a better indicator of living standards. Even so, South Korea by the 1970s was growing much faster, essentially doubling North Korea’s aggregate output by 1975 and essentially equalizing per capita income at $605.45 The agency projected slower growth for North Korea through the mid-1980s,

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especially as compared to the high-flying South, due to low rates of return on the high investment levels and to high levels of military spending. The late 1950s and early 1960s were thus in many ways the high-water mark of Kim Il Sung’s rule, just as they were the low-water mark for South Korea. In little more than a decade, Kim had accomplished complete socialization of a conservative Confucian economy, had brought his country back from a disastrous war with the world’s superpower, and had resuscitated and advanced his economy into something of an industrial power, leaving his rivals in the South in the dust. And he was dictating to Moscow and Beijing how much aid they should give him. A declassified CIA national intelligence estimate (NIE) of 1961 puts the then current situation well, although it misses badly in making an optimistic forecast for North Korea and giving an extremely dour outlook for the South. Its bottom line was that the chance of a North Korean invasion at that point was low, given time was working on its side. More likely, South Koreans would soon be flowing north to find jobs. However, the economic accomplishments of the North Korean regime and its propaganda proposals [in which it was offering economic aid especially for South Korean students] may in time exert considerable influence in the south. With help from the USSR and other members of the Bloc, the North Korean regime could in fact make good on most of its offers of economic assistance to South Korea. North Korea has the electricity and is capable of constructing the plants. . . . In sum, the greatest threat to South Korea does not come from North Korea. It comes, instead, from within South Korea itself: from the country’s shaky economy and its almost perpetual state of crisis. . . . The prospect for South Korea over the next few years is therefore very cloudy and uncertain.46

A US State Department update the next year, 1962, called the economic outlook for South Korea “grim but not hopeless.” CIA’s NIE emphasized in its outlook the same mistake that Kim was making: the high share of GNP going to investment, about 25 percent compared to 15 percent in the South. But the investments were increasingly generating weaker returns, and the productivity of investment spending was likely in decline given the substantial waste. In contrast, South Korean investment, driven by exports and rising domestic savings, was sparking a historic boom that led the country out of poverty even as North Korea slowed, moving toward famine.47 The Soviets might have been amused reading the CIA document, given the difficulties they were having with their Korean ally. While voicing its dismay in diplomatic traffic, Moscow had never forced Kim to comply and join its plans for the bloc countries, and its aid continued to flow, including rebuilding the former giant Mitsubishi integrated iron and steel mill in Chongjin, renamed Kimchaek after a labor hero, probably the country’s

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largest industrial establishment even now. Major Soviet efforts were in the metallurgical and energy sectors, including building a refinery in Najin in the northeastern tip of the country and supplying it with 2 million tons of crude petroleum a year—sold at cheap socialist not market prices. And they helped build a coal-fired electric power industry to compliment the hydropower system originally built by Japan. One of the largest projects was the building of the huge Pukchang thermal power plant in the mid-1960s, a near copy of Manhattan’s main power plant of about 1900. Pukchang, now antiquated, remains North Korea’s primary electricity supplier, accounting for about one-third of national capacity, feeding the city of Pyongyang and the central part of the country. It was built with sixteen 100-MW turbine generator units that are inefficient by today’s standards but are not too large for the country’s machine-building industry to maintain and even replace. A prime candidate as a foreign investment technological upgrade, the plant sits next to a large underground coal mining area that unfortunately, for potential Western investors, is mined by political prisoners. As South Korea began building nuclear electric power plants in the 1960s and 1970s, Kim asked the Soviets for help in doing the same, and in return for his subscribing to the International Atomic Energy Act (IAEA), Moscow began to supply nuclear technology, establishing the Yongbyon facility that has provided most of the country’s plutonium, this after Pyongyang withdrew from the IAEA and after the Soviets scrubbed the assistance. Kim tried again to build a nuclear power industry with the US Agreed Framework deal as one of his last acts as president, but this also collapsed as the regime couldn’t separate its nuclear electric power and nuclear weapons ambitions. A small, indigenously built pilot light-water reactor has been built, along with a uraniumenrichment facility to supply it—or more likely, to fuel highly enriched uranium weapons—but despite substantial efforts, the regime has made little progress in its own nuclear power development. The opportunity costs of that effort are by now enormous, with very little new investment in the important power sector since the 1960s. A country that once boasted some of the highest per capita electric use in the developing world and was volunteering to send power to South Korea as aid in 1961 is now continuously plagued by power shortages. The practical is simple—electricity is nearly free in the socialist pricing system—but the political solution is difficult as an entire industry rests on cheap energy. Foreign Aid: Too Much of a Not-So-Good Thing North Korea has long been noted as adept at using its geography and its frontline status in the socialist world’s conflict with the United States to its advantage, especially after the Sino-Soviet split in the late 1950s. One gets a

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sense of this in a 1960 discussion, recorded in Chinese cable traffic, of a North Korean economic delegation visiting Beijing and discussing with premier Zhou Enlai the annual requirements for the new seven-year plan, including the need for 2.5 million tons of coking coal. In return, North Korea would provide 1 million tons of iron ore and 500,000 tons of anthracite. But the Chinese could only provide 2 million tons of the coal, constituting half the total value of the trade, and Premier Zhou Enlai was most apologetic. The North Korea delegation leader, throwing juche to the wind, pleaded, “You must understand, you are our only source of coking coal. Our trade is nothing to your great country, but it is everything for us. Without China we are nothing.” Zhou replied, “Don’t underestimate your strength. [You are] our outpost of the East. American imperialism has ten claws and North Korea is holding back one of them. You have ten million people. In the socialist camp of one billion people, that is only one-hundredth. But you are holding back one tenth of America’s claws. Your burden is the greatest!” And with that, he said not to worry about the accumulating trade debt. China wouldn’t demand repayment. It’s a formula that hasn’t worked well when borrowing from the capitalist countries.48 The Soviet Union and China were always the necessary allies and partners of Kim’s North Korea, but Kim, while continuously asking for aid from both, was not interested in integrating economically with either of the two communist giants. His juche ideal is just the opposite: to stand apart and make his own way, taking advantage of each wanting to prevent the other from taking him over. But from the beginning, South Korea, for Kim, was another matter. Integration, by military conquest or economic subversion, was Kim’s focus, even before socialization was completed in North Korea. His big problem—the CIA’s 1961 conclusions to the contrary—was that the Park Chung Hee “junta” began to make enormous economic strides using, what must have appeared to Kim, unfair advantages offered by the United States, Japan, and the West. It wasn’t the capitalist system, according to Kim, but the magic of modern technology that was making the difference. Opening would be necessary to get that technology, but reform of the planning system would not. Kim thus changed the country’s strategy and in the early 1970s opened to the capitalist West, turning to Western Europe and Japan for industrial equipment purchased on credit. In the ten years from 1965 to 1974, Pyongyang imported about $2 billion in Western machinery and equipment and another $500 million from the bloc countries, taking on about $1.6 billion in hard-currency debt. Major imported plants included a 3-million-ton-per-year cement plant from Denmark, still the country’s largest; a French petrochemical complex in Anju, fueled by Chinese naphtha delivered by a new pipeline; mining and power equipment from Scandinavia and Germany; and general machinery from Britain. Many Volvo sedans imported from Sweden are still seen in Pyongyang.

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The Europeans provided subsidized, risk-free EXIM bank–type loans, and British and other commercial banks extended loans, expecting to be repaid as North Korea was priming its world-scale lead and zinc mines in the Gilju and Tanchon areas for export. But politics were likely also involved, a chance for European politicians to open up North Korea and a Western consensus that, for all their trouble, socialist states always paid their sovereign debts. From balanced hard-currency trade in 1970, only $60 million each in exports and imports, North Korea’s exports rose to $280 million in 1975, while imports jumped to $510 million, including $430 million in machinery and equipment in just that one year.49 In 1976, poor weather—Kim’s always lurking “cold front” that was destroying agriculture—and a sharp drop in nonferrous metals prices, combined with a debt-servicing ratio approaching 100 percent, caused Pyongyang to default on the debt, a problem from which the country has never recovered. Outside credit was cut off, and except for aid funds, Pyongyang has not been able to borrow hard currency from anyone ever since. Several attempts at workouts were made, and lenders have tried to pull North Korea into the International Financial Institutions to repair their credit, but Kim and his successors, stung by their embarrassing experiment with the capitalist world, have never provided the financial data that would be required, let alone made needed policy changes that would incentivize exports. Meanwhile South Korea’s imports of industrial equipment soared, and exports followed, knocking Kim out of international economic competition. Not a good loser, Kim turned to terrorism and building up his conventional and then nuclear armed military.50 Conclusion One can learn to appreciate aspects of Kim Il Sung’s juche, resisting what he describes as the “big power chauvinism” of China and the Soviet Union and the “flunkeyism” of South Korea’s supposed toadying to the United States, but there isn’t much positive that one can say about Kim’s economics. Charles Armstrong writes, “North Korea’s development path has been a failure by almost any measure, as was beginning to become evident in the 1980s.”51 Kim’s prime legacy is the terrible famine that ravaged the country shortly after he died and a bankrupt economy for his son to try to resurrect. Spouting “self-reliance,” the country was anything but, deeply dependent on foreign aid, supplied even by his enemies—a poison pill protecting his regime from anyone who would have thought to take it over. He had inherited a country with far better infrastructure, industry, and natural and human resources than any other in Asia outside Japan, and Japan had just been devastated by World War II. Alone in Asia, Korean territory had not been touched by that war. Kim took advantage of the departure of Japanese own-

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ers and the flight of Korean capitalists and landlords to Seoul to nationalize virtually all “means of production,” going further and faster than even his Stalinist mentors recommended. Hundreds of Japanese-built factories and good transportation and electric infrastructure then formed the base of the new state’s industry, especially strong in heavy industry, metals, and chemicals. Coal- and hydro-powered electricity could be supplied at per capita levels close to those of Europe, at least according to China’s leadership, which nevertheless poured in assistance. And the population even then was surprisingly literate, helped by Japanese schools, which ironically had tried to force the Japanese language on the population. Human capital was especially high compared to the poor livelihood of the people. In November 1958, on one of the DPRK leader’s many visits to Beijing, as the Chinese army in North Korea was finally packing its bags and as a new trade and aid agreement was being negotiated, Kim Il Sung and Premier Zhou Enlai become involved in a long and detailed discussion of the satisfying economic developments in both countries, welcomed after so many calamities earlier in the decade.52 Zhou had championed China’s intervention in the Korean War and now congratulated Kim on North Korea’s economic successes. It was clear, he says, that North Korea was ahead of China, despite the fact that Kim was asking for a lot of aid. Kim told Zhou that North Korea would produce 8.9 million kWh of electricity that year and 10 million kWh the next, with a goal of 20 million kWh, probably by the end of the next seven-year plan. Zhou remarked that all of China produced only 30 million kWh. Perhaps a bit exasperated, he said, “We see across the river [Yalu] that you leave the lights on.” Zhou seemed excited about Mao’s newly developing “Great Leap Forward” program, and Kim chimed in, saying they were following much the same tactics.53 Everyone, even peasants, could engage in industry and make steel, they both agreed. Zhou summed the conversation up, saying, “You are walking ahead of us. Isn’t it great you will be first to build socialism?” Kim responded with modesty, feigned or real: “It is with your help.” Vice Premier Chen Yi finished, “It is mostly by yourself. Your self-reliance.”54 Focused on future industry and the might of the nation, with little thought given to the dismal present, North Korea’s economy grew by dint of huge inputs of labor and capital, much of it foreign and unpaid for, through the mid-1970s but at an ever-declining rate. Hindered by a weak planning system and the absence of a market economy to backstop failures, productivity in the use of both labor and capital failed to rise, and by the 1980s the economy had stalled. With the end of Soviet “friendship prices” and aid and with huge changes in a rapidly liberalizing and reforming China, Kim was unable to adjust or reform. As the country teetered on the edge of its worst famine, his son, Kim Jong Il, was given the unenviable task of trying to pick up the pieces.

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Notes

1. Juche was first introduced by Kim Il Sung in a speech in 1955, in which he defined the concept as combining three parts: political independence from neighboring states, military capability to defend the country, and economic self-reliance and autonomy. Self-reliance, of course, goes much beyond economics and, especially in this Korean case, is a nationalistic and cultural concept, the idea that Koreans can do things on their own, independently of their big neighbors. It also has cultural roots, as when small villages tended toward self-reliance rather than trade with others. But we emphasize here that Pyongyang has again and again tried to apply it to the economy, creating a system that fails to take advantage of the international division of labor—a problem recognized even by its Soviet advisors soon after the failure of the Korean War—even as it has accepted, even demanded, huge volumes of foreign assistance. 2. Shen and Xia, “China and the Post-War Reconstruction of North Korea,” 15. 3. “Report, Embassy of Hungary in North Korea to the Hungarian Foreign Ministry,” History and Public Policy Program Digital Archive. 4. “Li Fuchun’s Report on Sino-Korean Trade Negotiations,” History and Public Policy Program Digital Archive, 1. 5. Grossman, “Notes for a Theory of the Command Economy,” 101–123; Kornai, Overcentralization in Economic Management, 34; Kim, Unveiling the North Korean Economy, 20. 6. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 10. Kim initially put it this way in a December 28, 1955, speech to his propaganda department: “While those who returned from the Soviet Union advocate the Soviet method, those who returned from China advocate the Chinese method. It is a meaningless debate. . . . We are carrying out the Korean Revolution. . . . The Korean Revolution is the Juche of our party’s ideological work. Thus, all our ideological work should serve the interests of the Korean Revolution.” 7. Taewongun was a conservative regent prince who in the late eighteenth century successfully resisted an incipient reform movement like that which was occurring during Japan’s Meiji Restoration. Some might argue that today’s North Korean leadership is like the regent, pushing against outside-oriented reforms to protect a pure Korean state culture. 8. Korean workers immediately took over some of the factories as the Japanese managers left, but the Soviet army quickly replaced them, creating more structured state firms. 9. Scalapino and Lee, Communism in Korea, 1196. 10. “Untitled Memorandum on the Political and Morale Situation of Soviet Troops in North Korea and the Economic Situation in Korea,” History and Public Policy Program Digital Archive. 11. Lankov, “Terenti Shtykov”; Kim Il-Sung Works 2, 93. 12. Scalapino and Lee, Communism in Korea, 342–343. 13. Kim, Land Reform in South Korea Under the U.S. Military Occupation, 97– 129. 14. Kim Il-Sung Works, 19, 254. 15. Scalapino and Lee, Communism in Korea, 342. Descendants of many South Korean residents who came south during this period still claim their northern farms, a large issue for unification should it ever happen. Northern farmers probably understand that many southerners still claim the land and thus resist.

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16. “Untitled Memorandum on the Political and Morale Situation of Soviet Troops in North Korea and the Economic Situation in Korea,” History and Public Policy Program Digital Archive. 17. “Untitled Memorandum on the Political and Morale Situation of Soviet Troops in North Korea and the Economic Situation in Korea,” History and Public Policy Program Digital Archive. 18. “Record of a Conversation of Cde. Stalin with Kim Il Sung and Pak Heonyeong,” History and Public Policy Program Digital Archive. 19. “On the Three Principles of National Reunification,” History and Public Policy Program Digital Archive. 20. An unanswered question is whether North Korean families still remember and have documentation regarding the plots they owned in the 1945–1956 period. This would potentially make decollectivization more feasible. 21. Farmers were given a kind of deed when they were awarded land in 1946. The existence of these could help determine whether there is an equitable way of returning land to its former tenant owners. 22. Comparative advantage is often misunderstood. Any country can gain from trade by focusing on those goods or services that it can produce relatively efficiently— that is, by using less labor or capital—than it can other products, exporting the former and importing the latter. Kim Il Sung seemed to want to build a comparative advantage in almost everything, which makes no economic sense. A well-working price system is needed to find out where the advantages and disadvantages lie. Otherwise, North Korea may export coal that it should be using to produce electricity, which it could in turn use, for example, to refine its zinc for a higher-value export. This inefficiency seems to happen with North Korean coal priced at international markets and zinc priced at socialist prices, leading to the export of the former and not the latter. 23. Orr, “1942 Declaration for Greater East Asian Co-Operation,” 1–5. 24. This is essentially the same list as promulgated by Kim Jong Un seventy years later in his party congress speech of January 2021. Christopher Green, “North Korea Plots a Course of ‘Heavy Agony’ for 2022,” January 10, 2022, International Crisis Group, https://www.crisisgroup.org/asia/north-east-asia/korean-peninsula/north -korea-plots-course-heavy-agony-2022. 25. Scalapino and Lee, Communism in Korea, 1212. 26. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 2. 27. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 5. 28. Kim, Unveiling the North Korean Economy, 43. 29. This was the famous Daein or Taein System, by which the party and politics took administrative command of the enterprises. Kim, Unveiling the North Korean Economy, 44. 30. Scalapino and Lee, Communism in Korea, 1245. 31. Kim Il Sung Works 19, 391. 32. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 9–25; Wilson Center, “North Korea Documentation Project.” 33. Kim Il Sung Works 19, 34. 34. Kim Il Sung Works 19, 35. 35. Kim Il Sung Works 19, 36. 36. Kim, Unveiling the North Korean Economy, 36. 37. Chosen Bank is a “monobank”; that is, it combines the duties of a central bank in charge of the nation’s money and a deposit-taking and lending commercial bank with hundreds of branches. The only other bank at the time was a specialized Foreign Trade Bank for foreign transactions. Won, yen, and yuan all derive from the

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Chinese character for dollar. South Korea at the time named its currency unit the hwan, but changed it to a new currency, also named the won in 1964. 38. Armstrong, “Fraternal Socialism,” 7. 39. “Notes from a Conversation Between the 1st Secretary of the PRL Embassy in the DPRK with the Counselor of the Embassy of the USSR, Comrade Makarov, on 27.VIII.1957,” History and Public Policy Program Digital Archive. 40. Kim Il Sung Works 19, 134. 41. These have been collected and translated by the Woodrow Wilson Center for International Studies in its Cold War Project. 42. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 17. 43. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 17. 44. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 4. 45. A ration ticket is not money, even though it is a “medium of exchange,” since it cannot be transferred and is date-limited, meaning it has no store of value. A person cannot store up ration tickets for financial savings or security. The North Korea estimates were made by this author for the CIA’s Office of Economic Research in 1978 and published in summary form in an unclassified manuscript, accessible through DOCEX Library of Congress. The data is often misused to say North Korean living standards were higher in the north through the mid-1970s. That is probably not the case since North Korean consumption, a better estimator of living standards, comprised only about half of GNP, with investment (20 to 30 percent) and government and military spending accounting for the rest. The paper concluded that North Korea’s economy was growing but at a slowing pace and was increasingly falling behind the rapidly advancing South Korean economy. This, it predicted, would continue at least through the mid-1980s. CIA, Korea. 46. CIA, NIE, “Outlook for South Korea,” 12. 47. Noland, Avoiding the Apocalypse, 171–194. Noland describes a slowmoving famine that began far before the climatic events of the early 1990s, caused by declining productivity in agriculture. 48. Wilson Center, “North Korea International Documentation Project,” May 2015, 10. 49. CIA, Korea, 7. 50. CIA, Korea, 7–8; Scalapino and Lee, Communism in Korea. 51. Armstrong, Juche and North Korea’s Global Aspirations; Eberstadt, The North Korean Economy, 31. 52. China’s contribution to North Korean reconstruction was largely in terms of manpower. Thirty-six divisions remained in North Korea until 1954–1955, at which point nineteen returned to China, leaving the rest until 1958. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 3. 53. This becomes the Chollima, or Flying Horse, Movement, with some of the same exuberances—backyard steelmaking—as China’s. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 22. 54. Shen and Xia, “China and the Post-War Reconstruction of Korea,” 61–62.

3 Economic Transformation Under Kim Jong II Sangsoo Lee

By the early 1970s, North Korea’s economy had already started shrinking, and it stagnated until Kim Il Sung’s death. After Kim Jong Il took over in 1994, North Korea faced serious domestic economic challenges, and starvation was widespread. Due to the famine and economic downturn in the 1990s, Kim Jong Il had to overcome urgent economic difficulties through reforms. With the 2002 reform, a market economy emerged partly as a coping measure to help the North Korean economy recover from the crisis. However, economic transformation under Kim Jong Il was a matter of survival due to internal pressure to solve the regime’s urgent problems. It was merely a temporary measure, because a long-term process could bring the risk of fundamental political change. Still, the question remained whether marketization would become an irreversible trend in North Korea. Economic Hardship and Famine, 1994–1998 From the early 1960s to 1990, North Korea’s economy was heavily dependent on economic support from the Soviet Union, China, and a number of other socialist countries, even as North Korea’s official propaganda consistently stressed “self-reliance” as the core principle of its economic development.1 When Kim Jong Il took power after the sudden death of his father, Kim Il Sung, in July 1994, North Korea faced many external and domestic difficulties. The country was totally isolated from most other countries, communism in the USSR and Eastern Europe had collapsed, West and East Germany were reunited, and South Korea had established diplomatic relations

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with the USSR and China. As shown in Figure 3.1, the economy suffered further negative shocks with the withdrawal of Soviet economic and energy supports in the mid-1980s and the subsequent collapse of the Eastern bloc economies, which had been North Korea’s largest trade partners in the early 1990s. Furthermore, in the face of this negative external circumstance, North Korea attempted to solve all problems based on the juche ideology of self-sufficiency, a different approach from that taken by other socialist nations such as China and Vietnam, which willingly pursued economic openness and reforms. However, under this “self-reliance” policy, a shortage of foreign exchange due to a chronic trade deficit, lack of foreign investment, and dwindling foreign aid constrained economic development. Consequently, when Kim Jong Il took power, the country had already faced a serious economic problem, in particular a shortfall in food production. For instance, rations had been severely reduced, and people in major industrial cities had been suffering from severe food shortages, malnutrition, and chronic hunger in the early 1990s.2 This was followed in August 1995 by widespread flooding that destroyed much of the nation’s rice crop. Thus, the poor rice harvest that autumn severely impacted a population that was already debilitated by starvation, and the situation worsened even further in 1996. Eventually, in the mid-1990s, one of the worst famines in the twentieth century, known as the “Arduous March,” killed over 330,000 people.3 Although natural disasters can be seen as a primary source of the famine, as the North Korean government claimed, the government failed to take all the necessary steps it could have to alleviate the shocks. Figure 3.1 Real Annual Growth in North Korea’s GDP, 1990–2013 "# $#

Percent !"

%# &# '# (#

!'# –1

!&# '))(# '))"## &(((# –2 (# &(('# &((&# &((%# &(($# &(("# &((*# &((+# &((,# &(()# &('(# &(''# &('&# &('%# !%# –3 –4 !$# –5 !"#

Source: Bank of Korea.

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First, the decline in agricultural production was already underway before the floods of 1995, and the government was slow to take the steps necessary to guarantee adequate food supplies, such as food imports from foreign countries. Second, as a result of a lack of transparency on the part of North Korea, rather than receiving international aid as a means to properly address the famine, the government blocked aid from reaching some of the most vulnerable parts of the country and ended commercial food imports, treating international aid as a form of subsidized food import.4 Third, the malfunctioning of the national transportation system impeded the delivery of food to the hungry, worsening the food situation in urban areas. For example, no food deliveries were made from agricultural areas to urban areas for two and a half years.5 Therefore, to attribute the famine primarily to external causes—natural or manmade—is to neglect the fundamental failure of the North Korean government to respond to its changed circumstances in a timely and appropriate way.6 All in all, in the mid-1990s, the country found itself in an acute economic crisis in terms of agricultural output, industrial production, and foreign trade exports.7 Economic Recovery, 1999–2001 With the economic crisis of the 1990s, the national distribution system collapsed, and people came to rely more on black markets for their survival. Furthermore, public suspicion of the regime’s economic policies had increased as a result of the long-term economic downturn in the 1990s. Consequently, the pressure from the bottom of society on the Kim Jong Il government for reform measures gradually increased in the aftermath of these serious economic and food crises. Given this situation, the government began to consider finding a solution to these crises, openly advocating the reforms described in “On Improving and Strengthening Socialist Economic Management Towards the Need for Construction of a Powerful and Prosperous State.”8 These reforms represented a timid attempt to make a change in the North Korean economic system. Furthermore, the rise of Jang Song Thaek’s political power among the decisionmakers pushed economic reform and expansion of economic dependence on China. Considering that most military officials in North Korea were conservative and lacked knowledge of the capitalist economy and that the officials in the cabinet with fair economic knowledge did not have sufficient political power to press their bold initiatives, Jang Song Thaek’s rise to responsibility for the economy has great significance.9 For example, Jang Song Thaek was one of the main promoters of the special economic zones project within the economic reform framework. This new

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economic attempt was also encouraged by the South Korean approach to engagement policy after Kim Dae Jung took office in 1998. Following the inter-Korean summit in 2000, the Kim Dae Jung government’s aid under the “Sunshine Policy” provided a positive environment for North Korea to try to push the new economic measures. July 2002 Economic Reform After ten years of economic degradation in North Korea, the cabinet instituted reform initiatives in 2001, while the military still dominated most foreign business in the country. At the Supreme People’s Assembly in April 2001, Prime Minister Hong Sung Nam reported several measures, including agricultural reform and an opening-up policy, which were understood as “improving economic management.”10 To implement initiatives, in July 2002 the North Korean government established a series of economic reforms intended to improve the economic situation in the country. These reforms included four main measures:

1. Monetization of the economy, or the abolition of the traditional communist coupon system for food rations, which allowed the supplydemand mechanism to determine prices of goods. Measures included pegging official prices and wages closer to market levels. 2. Decentralization of economic decisions regarding agricultural and industrial production from the central government to single production units, which was intended to stimulate an entrepreneurial attitude and instill responsibility in the working units. Permitted individual cultivation of farmland increased from 100 to a maximum of 1,300 square meters, and peddlers’ markets for consumer goods emerged and were allowed in 500 places.11 3. Abandonment of the artificially high value of the North Korean won, whose value was fixed to 150 won for US$1 before the reform, and consequent adjustment of prices and wages to higher levels. Furthermore, foreign currency shops, private restaurants, karaoke bars, rooms for rent, repair services, money exchanges, and private lenders all began to appear and were tolerated. This caused inflation, and the won was devalued from 159 won to the US dollar to more than 3,000 won on the illicit markets.12 4. Establishment of special administrative and industrial zones in Rajin, Sonbong, and Sinuiju on the borderline with China in order to stimulate economic cooperation. Since 2002, North Korea has allowed private trade and has launched joint ventures with international partners referred to in the “2002 July Economic Reform.”

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The goals behind the first and second measures were to increase the country’s official food supply, to regain state control over economic sectors suffering from black market encroachment, and to reduce the state’s subsidization burden. The third and fourth were geared toward looking abroad and supposed to obtain a large amount of capital in order to kick-start the North Korean industrial sector and thereby lead to the increase in productivity necessary to achieve Pyongyang’s domestic goals. It is estimated that these reforms introduced some market functions and normalized money functions, which were determined by the principle of supply and demand and resulted in a remarkable change in the daily lives of ordinary people in the North, such as access to food and clothing.13 Nevertheless, in practice, the measures failed. The core problem was that such reforms were established on an already cracked economic base, which needed profound and consistent change from the ground up. In fact, these reforms did not aim at restoring the economy through either liberalizing prices or decreasing Pyongyang’s control over economic planning. The most radical measure was probably the monetization of the economy, but the hyperinflation derived from the artificial adjustment of prices and wages to the devaluation of the won complicated the economic situation, leading to a complete breakdown in the food-distribution system. As a result, prices of consumer goods for daily use increased by a factor of roughly twenty.14 In short, the reform did not fundamentally improve the reconstruction of the national economy or people’s livelihoods, although the regime still seemed eager for change and showed an apparent readiness to do things that would have seemed impossible before.15 Recentralization, 2005–2008 Although the trend of reform continued until 2004, the authorities, who discovered and for practical purposes even supported this trend, had to endure an “uncomfortable cohabitation” with the market. Particularly during the latter period of the Kim Jong Il era from 2005 to 2008, the authorities carried out an active control policy toward the market since they considered the level of marketization to be a potential threat to the government.16 The effort to control the market was not limited to food but was a wider assault on market activity—for example, the imposition of escalating age restrictions on market traders.17 In 2007, the government launched a crackdown on antisocialist activities and took drastic measures to suppress the spread of capitalist ideals. The government imposed multiple restrictions on the type and number of articles that could be sold in the market, significantly lowered the price of goods,

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and banned necessities such as medical supplies, reserving the right to sell such items for state-run facilities. As an additional measure, in 2008 North Korean authorities prohibited women younger than forty years old from doing business.18 From mid-January 2008, the government also stepped up inspections of the general markets to control the range of goods on offer, with the apparent intention of reverting to the more limited farmers’ markets, which were permitted to trade only in supplementary foodstuffs.19 Thus, in the second half of the Kim Jong Il era, the government confronted the “distribution system and market” conflict as well as the “control guards and market vendors” conflict in people’s daily lives.20 Despite this, all efforts failed because of resistance from citizens who had become accustomed to capitalist ideas. Indeed, these efforts caused the markets to clam up, robbing them of the exchange and supplies needed, leading to a complete breakdown in the distribution of necessary goods and foodstuffs. It was demonstrated that inspectors were unable to control people, particularly middle-aged women eager to feed their families by selling homemade goods in the market, with force. Furthermore, the function of monitoring market activities collapsed, as inspectors sought bribes from market traders. Against this background, in 2009 the government again considered launching new reforms intended to restore the pre-2002, Stalinist-like economic system and regain complete control over the market to prevent people from becoming accustomed to a capitalist economy. 2009 Currency Reform In November 2009, the government carried out a sudden currency reform. The won was revalued and fixed back at its pre-2002 rate—that is, the old currency rate of 100:1—causing a new acceleration of inflation, exceeding 100 percent per year.21 Furthermore, the use of foreign currencies was prohibited, and unauthorized possession of foreign currency was essentially criminalized. Despite this, foreign currency was still prevalent in Pyongyang and other major cities due to the long-standing distrust of local currency. The currency reform was sprung without warning; the public was given only days to convert their holdings. Most critically, it included confiscatory limits on the ability of citizens to convert their currency holdings. The “reform” constituted a direct attack on the emerging market economy and the independence from state control that it represented.22 On one hand the purpose of currency reforms launched in 2009 was to confiscate wealth from individual traders and redistribute it to the poor peasants and workers. On the other hand, the reform was made to regain complete control over the market, as the government feared that since 2002 the North Korean people had been gradually becoming accustomed to operating in a capitalized mar-

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ket system. Furthermore, the government expected to expand its financial resources by the confiscation of traders’ wealth. The government was confronted with the need to significantly expand its fiscal spending in preparation for the 100th anniversary of Kim Il Sung’s birthday in 2012 and the expenses for the guaranteed establishment of the Kim Jong Un succession. It can be said that in the short-term, the currency reform was effective in weakening the market forces threatening the government. Nevertheless, in the long run, the currency reform failed as government prices for many essential items rose significantly. In November 2012, the price of North Korean rice and the yuan (Chinese) exchange rate both reached post-2009 record levels in Yanggang Province, with domestic rice surpassing 4,000 won per kilogram and one Chinese yuan selling for 720 North Korean won (in October 2011, the price of a kilo of rice was only 2,600 won and one Chinese yuan was worth 515 North Korean won).23 The attempt eventually resulted in a new failure: at a technical level, the implementation of the currency revaluation was undermined by the inability of the state to have sufficient goods to restore the public distribution system as a replacement for the open market. In short, most people ended up financially worse off than before the reforms. Furthermore, under Kim Jong Il, the reforms themselves caused the markets to clutch up, robbing them of the exchange and supply needed, leading to a complete breakdown in the distribution of necessities. North Korea faced a systematic difficulty in setting prices in the aftermath of the reform, and this further interfered with the functioning of the markets and made normal commerce difficult to conduct, leading to a shortage of goods and contributing to the spread of famine. Consequently, the aftereffects of the currency reform catalyzed additional public distrust of the government as a result of rising inflation, and this had a negative impact on the population’s loyalty to the government. The biggest motivation driving the currency reform was Kim Jong Il’s intention to regain complete control of the markets, strengthen the centrally planned economy again, and counter the forces of an emerging free market that could have undermined a smooth succession process for Kim Jong Un. In practice, the situation following these reforms was even worse than that of 2002, and North Korea’s economy was once again shaken to its foundations. Driving Forces for Kim Jong Il’s Economy Kim Jong Il became the leader amid North Korea’s famine in the mid1990s. The deteriorated national economy and the collapse of the public distribution system undermined the buildup of his leadership from the beginning. Furthermore, when Kim Jong Il took power, as the party grew increasingly incompetent and corrupt, the loyalty of the masses weakened.

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Military-First Policy

Given this, to consolidate his power, Kim Jong Il emphasized a “militaryfirst” ideology as a governing base and utilized the military as the predominant organ of government and society in North Korea. In line with this policy, Kim gave the military a special role and elevated status as the ultimate stronghold of internal control. Kim also believed the military was useful not only for the purpose of internal control but to recover the deteriorated national economy swiftly. For example, the government might regard its army as the core of its laborers in economic construction, and the government responded to food shortages by sending the army into the cooperatives to seize grain.24 Furthermore, having more people in the military reduced the large rate of unemployment and therefore contributed to stabilizing the domestic economy. Thus, the regime expected the military would contribute to an improved economic situation in the short term. On the contrary, the military-first ideology made the economic difficulties even worse. The country spent around 20 percent of gross national product on defense toward the end of the 1990s, while North Korea had the world’s fourth-largest armed forces, with more than 1.2 million personnel. In fact, as the policy required a budget increase for the military sectors with a focus on heavy industry, such as power supply, coal mining, and metal production, the national finances gradually decreased in the area of light industry and agriculture. In other words, the unbalanced structure of industry influenced people’s living standards in a negative way. At the end of his reign, Kim Jong Il recognized the limits of militaryfirst politics for long-term national development, but it was too late. Bottom-Up Marketization

As the country’s food-distribution system broke down after the severe famine of the mid-1990s, the pattern of people’s daily lives, especially in search of food, changed profoundly. The biggest change was that households came to rely on the black market rather than the collapsed public distribution system for their food.25 In this change, women’s participation and role in market activities significantly increased, motivated by providing food for the family. In sum, North Korea’s marketization came about not by design but rather as a result of the state’s failure to sustain the livelihoods of its population.26 The grassroots marketization of the economy appeared to play an important role since it began with food and subsequently spread to other products.27 Although this move had a negative impact on the regime’s control of the nation, the regime ultimately tolerated the spread of commercial activity and marketization across the country, as it offered a

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means of survival for many North Koreans. Consequently, after the longstanding economic crisis in the 1990s, the regime began to seriously consider trying to find a solution to the national economic and food crises. Finally, the government allowed a limited market economy by taking the July 2002 economic reform. The 2002 reform introduced some “capitalist values,” such as the principles of pricing and the market. People began to realize that they could afford to gain food and manufactured goods by arranging their own economic activities. Indeed, after the introduction of the 2002 reform, Jangmadang (ground market) developed an autonomous marketization and sprang up everywhere in North Korea, particularly in big cities. Thus, the distribution system was replaced by Jangmadang, which became a critical space of survival for the North Korean people. However, the accumulation of private property following the spread of markets has made individualism a universal value in the North. Since then, without the market, the ordinary citizens cannot cope with daily life, and senior officials of the party, the government, and the army can hardly sustain their livelihoods without bribes originating in the marketplace.28 That is the reason why they have not tried to promote market activities, though the government has not actively strengthened repression of the market.29 With this new trend, some people have gained incentives from Jangmadang that created a gap between the rich and poor in society. This increasing gap and the creation of greater class differences have triggered social unrest in the country, which shows that the value of the economy has become an important driving factor in establishing a new society in North Korea.30 China’s Role

During the Kim Jong Il era, North Korea’s economic reliance on China, which provides most of its food and energy supplies, increased significantly. This is apparent in the following examples:

1. In the 2004–2006 period, the proportion of overall North Korean external trade (including with South Korea, whose total share was 25 percent in 2009) taken up by China remained stable at 39 percent. But from 2007 onward, this number again began to rise, reaching 53 percent in 2009, and it increased even after 2011. China accounted for an estimated 67.2 percent of North Korea’s exports and 61.6 percent of its imports in 2011.31 2. China’s direct investment has also increased since 2003. Chinese investment reported for 2008 was US$41.23 million, compared to only US$1.2 million in 2003.

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3. North Korea allowed for Chinese use of facilities in the RajinSonbong and Hwanggumpyong special development zones and permitted the joint development of its natural resources.

There were several reasons for China to engage in North Korea economically. First, Chinese entrepreneurs enjoyed many preferential concessionary terms for their investments, better than those offered to other countries. By using this advantage, Chinese companies aimed to secure new markets and natural resources.32 Second, China’s greatest concern was the collapse of North Korea’s regime, which would be a direct threat to Chinese economic development. For this reason, Beijing has continued to provide economic and energy aid to North Korea’s regime. Third, China has an ambition to make North Korea open up its economy by undertaking a path similar to past Chinese economic reforms. For example, Chinese officials often tried to highlight their economic successes to Kim Jong Il when he visited China in January 2006. Since the rapid growth of Chinese investment in North Korea makes it difficult for the regime to ignore China’s experience and advice, after Kim Jong Il visited China he gave an order to devise new measures for economic development in North Korea based on the Chinese economic development model.33 Since then, Beijing has continued to try to convince Pyongyang to adopt economic reforms, although Pyongyang seems not to be considering following the Chinese style of economic reform. Evaluation of Kim Jong Il’s Economic Policy

Consistency is one of the most important characteristics of economic reform and restructuring for any country, especially one that hopes to draw in foreign investment and outside partnerships. However, Kim Jong Il’s economic reform exhibited a characteristically “go and reverse” pattern of economic policymaking.34 Overall, the 2002 economic reform was initiated by the necessity to restore a communist-style economic system, but complete control over the market was regained through the 2009 currency reform. Go and Reverse

There was doubt regarding whether Kim Jong Il was willing to change the country’s economic policy. In any case, given North Korea’s strategic goal for government survival, the key factor in deciding whether or not to move toward economic reform was simply whether the reform would be good or bad for the future survival of the regime. It can be argued that the government was interested in improving people’s living conditions and that successful reform would help consolidate public loyalty to the leader. Yet Kim

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Jong Il faced the dilemma of economic reform necessity, as a degree of economic reform was crucial to ensure the government’s long-term survival, and Kim was very cautious in opening up the economy, while North Korea was taking certain economic reform measures. As a result, the “go and reverse” pattern was created by the government’s mixed feelings, oscillating between fear of national economic bankruptcy and anxiety about uncontrollable capitalism. On the one hand, the increase in economic difficulties had triggered people’s dissatisfaction in the country. As a result, the authorities considered such a phenomenon a threat to the government, and several economic measures were taken, aiming at recovering from these economic difficulties.35 On the other hand, Pyongyang was fearful of the possible threat to its government brought on by uncontrollable outside influence through the implementation of economic reform. As North Korea opened its economy, people were gradually getting more access to information from the outside world. In this new information landscape, domestic propaganda and a media blackout on outside information might not work as well as in the past. As North Korea has seen in the reform experience of other countries, such as China and Vietnam, intensive reforms are likely to result in increased inflows of outside information and influence into the country, which could in turn bring about the demise of the North Korean government. While North Korea tried to create an investor-friendly environment during the 2002 economic reform, at least in some special zones, Pyongyang was also reluctant to move toward opening its economy fully and soon returned to strengthening further the principles of socialist economic management after taking some measures for reform. The 2009 currency reform was an example of this. Indeed, the aim of currency reform was to reinstitute state control over the market and over public reliance on the state. With the government’s fear of opening up, these were mere situational measures intended to attract as much foreign investment as possible, without concretely abandoning the existing patterns of the economic system. External Environment

External factors had a great impact on the development of the policymaking process in North Korea. A pattern could possibly be seen: over time Pyongyang experienced an oscillatory trend, with peaks of international collaboration and opening and valleys of international isolation, poverty, and closure. For example, before the implementation of the 2002 reform, the geopolitical situation was relatively favorable for North Korea to attempt an economic reform. At the end of the Bill Clinton administration, in 2000, First Deputy Chairman of North Korea Jo Myong Rok and US Secretary of State Madeleine Albright exchanged visits. Prior to this, on

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June 15, 2000, the inter-Korean summit was hosted by the South Korean president Kim Dae Jung in order to improve relations between the two nations. Under the Kim Dae Jung government, tourism at Mount Kumgang began in November 1998 as a part of the inter-Korean reconciliation. Almost 2 million South Koreans had visited Mount Kumgang since its opening in 1998.36 The two sides also agreed to establish the Kaesong Industrial Complex (KIC) in June 2003. A large number of North Korean workers in the KIC gained access to advanced forms of South Korean industrial technology and know-how that would have been helpful for economic reform in North Korea. The KIC project used to be a symbol of cooperation between the two Koreas, together with the Mount Kumgang project, and a key source of hard currency for Pyongyang. During the Sunshine Policy era, money poured into North Korea, with a fivefold increase in inter-Korean trade between 1998 and 2005 to US$1 billion, providing the North with a major source of hard currency.37 Furthermore, Japanese– North Korean relations also improved after Prime Minister Junichiro Koizumi visited Pyongyang twice, in September 2002 and May 2004. In the summit meetings, the two leaders confirmed the Japan-DPRK Pyongyang Declaration, which included the issues of abduction and resumption of normalization talks. In addition, Japan promised to provide food and pharmaceutical supplies to North Korea as a measure of humanitarian assistance.38 Not only the neighboring countries but the European Union also appeared to have had the chance to become involved in making progress on the inter-Korean reconciliation process. The EU delegation—consisting of Swedish prime minister Göran Persson, Commissioner Chris Patten, and High Representative Javier Solana—met Kim Jong Il in May 2001, followed immediately afterward by a visit to Seoul. After this visit, the European Commission decided (on May 14, 2001) to establish diplomatic relations with North Korea and supported the easing of its acute food and health problems. Since 1995, the EU has provided more than €136.2 million in humanitarian funding to independent humanitarian organizations to support over 130 projects.39 The momentum was thwarted, however, with the inauguration of US President George W. Bush, who designated North Korea as part of the “Axis of Evil,” along with Iran and Iraq. The United States then invaded Iraq in 2003, overthrowing Saddam Hussein, and indicated its willingness to do likewise in other nations, on a preemptive basis. Since 2003, North Korea’s reform has been influenced by negative relations with the United States. Furthermore, the antireform movement was also largely influenced by the Lee Myungbak government’s hard-line policy toward North Korea. Since Lee Myungbak took office in 2008, South Korea’s economic aid to North Korea has been significantly reduced, which has had a great impact on the implementation of economic reform measures. Meanwhile, the vol-

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ume of trade between Japan and North Korea decreased 75 percent from October to November of 2006, in comparison to the previous year.40 Overall, since the discontinuation of large-scale South Korean, Japanese, and US aid, in particular in the aftermath of the first North Korean nuclear test in 2006, North Korea has become extremely dependent on just one sponsor, China, which provides most of its food and energy supplies— although, due to the imposition of UN Resolution 1718 on October 14, 2006, against Pyongyang’s nuclear test, even China partially suspended its economic support to North Korea. However, after a while, China’s support increased again. North Korea gets about 70 percent of its food and 70 to 80 percent of its fuel from China, which is North Korea’s largest trade partner, while North Korea ranked eighty-second (in 2009) among China’s trade partners.41 The best option for the government’s survival after the reduction of foreign financial supports through investment, economic cooperation, and humanitarian aid was muddling through with a series of ad hoc adjustments while supported by China, which would be considered a path with fewer risks of instability or collapse. This tendency has become more pronounced since 2011. North Korea’s external trade jumped 51 percent in 2011 to a twenty-two-year high of US$3.6 billion on the back of Chinese demand.42 For example, Pyongyang’s trade with China surged 62.4 percent from 2000 to US$5.63 billion in 2011.43 In sum, among other factors, the reforming process was undermined by the fact that the Lee Myungbak government reduced South Korean economic engagement in North Korea starting in 2008. In 2009 the direction of economic reform was completely changed toward antireform with the currency reform. Subsequently, North Korea’s economic isolation was furthered with missile and nuclear tests in 2009 and two provocations, the Cheonan and Yeonpyeong incidents, in 2010. Thus, regarding North Korean willingness for economic reform, Pyongyang cautiously looked at the South Korean and the US governments’ policies toward North Korea, which affected its internal decision. Meanwhile, Beijing continued to play the part of a protector by supporting Pyongyang politically and economically while pushing North Korea to follow the path of past Chinese economic reforms and improving the business environment for Chinese investors. Change in Power Structure

During the economic reform, the Kim Jong Il government also made a series of reforms in the power structure with the positioning of major individuals and organizations. The reorganizations of the political power structure had always made changes in the direction of North Korea’s domestic policy and the order of priority among different power groups.

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In the early Kim Jong Il era, the weakening political power of economic decisionmaking in the cabinet served as one of the major obstacles to push the new economic policy further, as the government still proclaimed military-first and heavy-industry-first policies to be the cornerstone of North Korea’s security. The direction of the economy was also largely determined by the military power elites who came to have overwhelming influence in North Korean politics.44 Meanwhile, about 2,000 high- and mid-level party-state officials were punished, and the Ministry of Security for Society executed one provincial and two central party secretaries during the so called Simhuajo incident between 1997 and 1999. Given this situation, the military increased its financial sources, such as mining business. The cabinet even pushed forward a pro-market reformist policy that mostly benefited the commercial activities of the various military units. Almost every military unit organized commercial trading firms and contributed to market expansion through numerous commercial branch offices and commodity-gathering stations all over the nation. For example, the military dominated the country’s valuable underground natural resources (the biggest source of foreign exchange) and around 70 percent of foreign currency business.45 As a result, the reform was ended without follow-up, due to the heavy conditioning of the military elites. However, growing discontent among party elites led to the disclosure of various latent power competitions between the military and the party. In this regard, the Korean People’s Interior Security Force under the Korean Workers’ Party, headed by Jang Song Thaek, husband of Kim Jong Il’s sister, initiated monitoring of the Korean People’s Army, seeking out elements that were corrupt and disloyal. Therefore, there was a broad crackdown on military trading companies in early 2008, and overall power has been gradually shifting from the military to the party’s Security Ministry, which is under the top leadership’s control (Jang Song Thaek), because the Kim family considers the army and social instability as potential major threats to their leadership. On the other hand, reformist ministers were purged. In 2007, Prime Minister Park Bong Ju, who had directed the reform policy, lost his position, though he returned to the government in August 2010.46 From May 2007 to October 2008, the hegemony of the reformists was replaced by that of the conservative-security coalition, which took more aggressive measures to reverse reforms. Even after Kim Jong Il had a stroke in December 2008, he pushed for a more serious antireformist movement, as what he needed when he recovered was internal security rather than market-oriented reforms. Since 2009, there has also been a partial generational shift in the military with the initiation of the succession project to stabilize the process of power transition from Kim Jong Il to Kim Jong Un. The rise of members of the so-called new military leadership has been accompanied by the rela-

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tive decline of the elderly military group. The new face, Ri Yong Ho, was appointed a four-star general in 2009 with the task of protecting the successor Kim Jong Un. In sum, the past policy changes, from military to economy and vice versa, by Kim Jong Il were accompanied by many personnel changes. Internal shifts were often used by Kim Jong Il to rule the power elites and ensure a stable transition of power. Conclusion North Korea faced serious domestic challenges in its economy in the 1990s. Areas such as food and agriculture, trade and investment, and market and energy were ripe for immediate reform. Some economic reforms were carried out in 2002, including the permitting of private markets. North Korea’s economic reforms during the Kim Jong Il era were positive for handling economic difficulties in the short run, while its process was without decisive steps toward fundamental reforms. However, many crucial barriers, such as the military-first policy, the self-sufficiency economy, the centralized economic system, corruption, and power struggles, hindered economic reforms and foreign investment in North Korea. Furthermore, the geopolitical environment surrounding North Korea also impacted the direction of economic transformation, in particular after the beginning of the George W. Bush and Lee Myungbak governments in the United States and South Korea. As a result, in the latter Kim Jong Il era, the state reimposed restrictions on private markets and retreated back to many of its old economic policies. Although overall changes in economic policy during Kim Jong Il’s rule were influenced by many different factors, such as internal politics and the external geopolitical environment, most importantly, Kim Jong Il’s intentions regarding economic reform were geared toward the survival of his regime. While the reforms urgently aimed to ease public dissatisfaction with the country’s economic system, Kim Jong Il was also concerned that the development of markets might undermine his leadership if comprehensive reforms were to be adopted. Thus, North Korea faced a catch-22 situation, in which Kim Jong Il couldn’t afford to push opening up and liberalization of the economy, as they might provoke unrest; yet without reform, the economic crisis would escalate, which might have similar social consequences. In conclusion, Kim Jong Il tried to find a balance between fear and economic incentives that would allow him to keep the populace under control. This indicates that the pursuit of reform was quickly followed by strict internal controls to sustain North Korea’s communist society. Kim

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Jong Un has faced the same dilemma of economic reform necessity as his father, as a degree of economic reform is crucial to ensure the regime’s long-term survival. After Kim Jong Un came to power, it was estimated in 2017 that there were 440 government-approved markets employing about 1.1 million people.47 In this regard, the North Korean regime still might have no option other than to allow these markets. Yet, in order to ensure its survival, the Kim Jong Un regime continues to control the market with strict measures. Too much control, however, could also provoke a people’s rebellion against the regime. Accordingly, the issue of marketization will continue to play a critical role in the direction of North Korea’s economic policy, and it will also act as a barometer of North Korea’s reform and opening in the future. Notes 1. Lankov, “The Resurgence of a Market Economy in North Korea,” 3. 2. Haggard, “Hunger and Human Rights.” 3. Kwaak, “North Korea’s Private Finance.” 4. Fuhrman, “3.5 Million Dead.” 5. “How Did the North Korean Famine Happen?,” Wilson Center. 6. Haggard, “Hunger and Human Rights.” 7. Scobell, “Kim Jong-Il and North Korea.” 8. “2007 nyendo Bukhan Shinnen Gongdong Sasol Bunsuk,” KINU. 9. Park, “Jang Sung-taek i Guage Jengchek Hengbo wa Hyanghu Jenmang.” 10. Park, “North Korea’s Economic Policy in the Era of ‘Military First’ Reform Measures in July and ‘Defense Industry First’ Strategy from September 2002,” 120. 11. Kiesow with Lee, “No Confidence in Korea,” 69. 12. Kiesow with Lee, “No Confidence in Korea,” 69. 13. Choi, Prospects for a Change in the North Korean Economy After the July 1, 2002, Measures, 55–56. 14. Park, “North Korea’s Economic Policy in the Era of ‘Military First’ Reform Measures in July and ‘Defense Industry First’ Strategy from September 2002,” 121. 15. Park, “North Korea’s Economic Policy in the Era of ‘Military First’ Reform Measures in July and ‘Defense Industry First’ Strategy from September 2002,” 116. 16. Cho, “Pyongyang’s ‘July Drama’ and the Direction of the Kim Jong-Un Government.” 17. Haggard, Noland, and Weeks, “North Korea on the Precipice of Famine.” 18. Park, “2008 Top Items in the Jangmadang.” 19. Haggard and Noland, “Sanctioning North Korea,” 8. 20. Cho, “Pyongyang’s ‘July Drama’ and the Direction of the Kim Jong-Un Government.” 21. Park, “Will North Korea’s ‘6.28 Directives’ Be a Prelude Toward ‘Reform and Opening’?” 22. Haggard and Noland, “The Winter of Their Discontent.” 23. Lee, “Rice and Yuan Zooming Up in Yangkang.” 24. Haggard, “The 6th Session of the 12th Supreme People’s Assembly (SPA).” 25. Haggard, “Hunger and Human Rights.”

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26. “Marketization of the North Korean Economy,” NSI. 27. Haggard, “Hunger and Human Rights.” 28. Haggard, “Hunger and Human Rights,” 19. 29. Park, “Opening the Pandora’s Box?” 30. Lee, “North Korea’s Third Hereditary Succession,” 15. 31. Cullinane, “How Does North Korea Make Its Money?” 32. Kim, “The Political Economy of Chinese Investment in North Korea,” 910. 33. Suh, “Significance of Jang Sung-Tae’s Visit to China.” 34. Muramoto, “North Korea and the China Model,” 1. 35. Lee, “North Korea’s Third Hereditary Succession,” 15. 36. Kim and Lee, “North Korea and Northeast Asia,” 188. 37. Kim, Demystifying North Korea, 76–77. 38. “Prime Minister Junichiro Koizumi in Action,” Prime Minister’s Office of Japan. 39. “European Civil Protection and Humanitarian Aid Operations: Where We Work—North Korea,” European Commission. 40. “Government to Extend DPRK Sanctions,” Yomiuri Shimbun. 41. Nanto and Manyin, “China–North Korea Relations,” 14. 42. Song, “N Korea Trade Soars on Chinese Demand.” 43. “N. Korea’s Per-Capita GDP Grows 4.7 Pct in 2011,” Yonhap News. 44. Park, “Kim Jong-Il, Gun gwa Dang, gurigo Kim Jong-Un- Sijanghuakdae wa Sijangekje Baehu i Gwonryok Jongqihak.” 45. Kim, “North Korean Leader, Military Waging ‘Money War.’” 46. Shin, “Leadership Shake-Up Adds to Signs of Change in N.K.” 47. Choe, “As Economy Grows, North Korea’s Grip on Society Is Tested.”

4 Byongjin Economic Policy Under Kim Jong Un Young-chul Chung, Yong-hyun Kim, and Kyungyon Moon

Regime change is accompanied by policy change. Decisions to either introduce changes or maintain previous policies can be classified into “innovation” and “succession.” In North Korea’s case, “succession” has been stressed more than in any other country in the world. In power transitions, nevertheless, “succession” normally comes with “innovation,” inevitably bringing change to social policies and policy lines. From this perspective, the North declared the parallel development policy of simultaneously pursuing economic and nuclear weapons development as its state strategy for the Kim Jong Un era. Arguably, it is a strategic line that has aspects of both succession and innovation, demonstrating Pyongyang’s desire for change.1 Succession and Innovation in North Korea’s Transition As noted above, “succession” inevitably brings change to policy. This can be confirmed by the power shifts of former socialist states. According to Rush, political successions in communist regimes follow a typical pattern: problems in the management of the succession, crises, settlement of crises, and political stabilization of the new ruler. This process is called the “transfer of sovereign power.”2 There might be limits in the application of Rush’s theory to the case of North Korea in that North Korea’s power transfer from father to son differs from the power transfers of the postcommunist countries of the Soviet Union and China. However, in Lee, Kim, and Hong’s analysis, there was clearly a power struggle in the process of political succession from Kim Il

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Sung to Kim Jong Il and from Kim Jong Il to Kim Jong Un for the stabilization of the legitimacy of the new ruler.3 Rush’s concepts of “succession” and “innovation” provide a persuasive theoretical framework for understanding North Korea’s power transition. With regard to political stabilization in the Kim Jong Il era, Jung argues that Kim Jong Il faithfully adopted his father, Kim Il Sung’s Byongjin policy, which prioritized the military, in the power transfer and stabilization process.4 The North’s founder, Kim Il Sung, advocated the “Byongjin line of simultaneously pursuing economic development and national defense” in 1962 as a response to the Cuban Missile Crisis and the appearance of the Park Chung Hee administration in South Korea following the military coup in May 1961.5 His son, Kim Jong Il, also adopted a strategic policy of simultaneously developing agriculture and light industry while giving top priority to developing the defense industry when the country was experiencing an economic crisis known as the “Arduous March” in the 1990s.6 Seen in this light, the Byongjin policy of the Kim Jong Un era can be said to be somewhat faithful to the “succession” of history. But the policy is different from the above-mentioned historical experiences in that it puts more emphasis on the economy, and it seems Kim Jong Un’s policy is close to Rush’s “innovation” in respect of the “transfer of sovereign power.”7 However, when, in March 2013, Kim Jong Un declared the Byongjin policy of simultaneously pursuing economic and nuclear development, many scholars predicted that it would be difficult for him to pursue a Byongjin policy that differed from the policies of his two predecessors. Hwang, Lee, Jung, and Kwon argue that although it seems that Kim Jong Un is seeking to resuscitate North Korea’s economy under the identical name of “Byongjin,” the Byongjin policy of simultaneously pursuing nuclear power and economic development has a structural limitation that cannot be accepted by the international community.8 Few scholars and analysts explain Kim Jong Un’s power transition style as different from that of his predecessor, Kim Jong Il. In particular, Jung, an analyst on the issue of North Korea, argues that Kim Jong Un’s policy is quite similar to Deng Xiaoping’s reform and open policy.9 According to his analysis, Deng established Liǎng Dàn Yī Xīng (referring to China’s historical achievement of successfully developing an atomic bomb in 1964, then a hydrogen bomb in 1967, and launching a satellite into space in 1970) for his predecessor Mao Tse-tung, and it became the basis and legitimacy of reform and the open policy of Deng. He argues that as Deng had confidence in military deterrence through Liǎng Dàn Yī Xīng, he was able to concentrate on economic development by reform and his open policy. In this sense, Jung further says that the Congress of the Workers’ Party of Korea, to be held in May 2016, might be the place where Kim Jong Un’s reform and open economic policy would be formalized.

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In addition, Lee and Jo argue that although Kim Jong Un inherited his predecessors’ Byongjin policy, he will put more emphasis on economic development than on military policy.10 Although they did not use the concept of power transition in their evaluation of the Byongjin policy adopted by Kim Jong Un in March 2013, Lee and Jo argue that the emphasis on economic reconstruction for the sustainable power transition of Kim Jong Un’s regime is inevitable due to changes in the operational environment surrounding North Korea. This is in need of radical reform and an open policy to attract foreign investment in resources and technology for economic reconstruction. The Kim Jong Un era is in its infancy, beginning suddenly at the end of 2011 after the death of Kim Jong Il, with the adoption of the Byongjin policy in March 2013. Therefore, as the existing literature was mostly issued in 2013, it is limited to providing predictions for the Kim Jong Un era based on analysis of the operational environment of the Kim Jong Un regime rather than the examination of domestic and foreign policies and statements made by Kim Jong Un. However, this study contributes to the existing literature through its analysis of accumulated policies and statements from the last three years since the Byongjin policy was adopted. Although Kim Jong Un inherited the Byongjin policy from the Kim Il Sung and Kim Jong Il eras, we argue it differs in that it pursues “security for development” rather than “development for security.” Kim Jong Un’s Byongjin policy is close to “innovation” in the respect of Rush’s “transfer of sovereign power” through the analysis of North Korea’s internal and external statements, budgetary resource allocation, policy reform measures, and foreign and defense policies.11 Kim Jong Il’s State Strategy: Development for Security The Kim Jong Il regime that emerged after the death of Kim Il Sung in 1994 made defending its socialist system the top state issue despite the economic slump. Placing prime importance on national security led to the Songun (military-first) policy. The policy, according to the North, prioritized the military and increased its social and political influence to cope with crises.12 However, the North’s ability to respond militarily was limited at that time by its lack of state resources. Facing a shortage of national resources, the North was forced to choose other methods that were different from those used in the past. Two options were chosen to ensure its own security: one was reinforcing its military capability, and the other was having the US guarantee its security by bringing the country to the negotiation table using nuclear weapons and missiles as bargaining chips. The two options were combined into one strategy.

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Above all, the former method was aggressively pursuing an asymmetric strategy—creating nuclear and missile development programs but abandoning military supremacy through the stockpiling of more conventional weapons, which was no longer possible. The two rounds of nuclear tests conducted by the North in October 2006 and May 2009 clearly displayed the North’s choice regarding the security of the regime. In addition, the North’s test firings of artificial satellites (rockets) conducted in 1998, 2006, 2009, and 2012 were also intended to demonstrate its nuclear capability and ability to develop rockets capable of carrying nuclear warheads. The second method, as can be seen in the Geneva Agreed Framework of 1994, pursued negotiations with the United States based on its nuclear and missile capabilities and the eventual normalization of diplomatic ties with the country. The objective of the agreement was freezing North Korea’s nuclear weapon and missile programs in exchange for a US security guarantee. Boosted by the emergence of the Kim Dae Jung administration in South Korea, the first inter-Korean summit of 2000, and the subsequent exchange of special envoys between North Korea and the United States, an agreement seemed likely. However, this amounted to nothing with the advent of the George W. Bush administration, and the two countries returned to a state of confrontation following the North Korea visit in 2002 by special envoy James Kelly.13 Amid this confrontational relationship with the United States, Pyongyang conducted two nuclear tests and testfired long-range missiles three times under the guise of artificial satellite launches. These behaviors of the North clearly aimed to demonstrate to the United States and the world its desire to build a politically and militarily powerful country to defend its regime. Economic development and improving the people’s livelihoods, another big issue facing the North, had been delayed. From the late 2000s, Kim Jong Il began to seek aggressive economic development of the country through cooperation with China, bypassing the United States. The North’s joint development of special economic zones with China and the expansion of external economic relations through increased trade with China came against this backdrop.14 As the security problem was not addressed completely, the North ended up seeking ways to revitalize its economy on a limited basis with its development strategy. This was the main reason behind the North’s constantly passive attitude toward opening up to the outside world. Nonetheless, what the Kim Jong Il regime achieved in two nuclear tests and test firings of long-range missiles became a firm basis for the country’s political and military capabilities, which led to the current leader, Kim Jong Un’s official declaration of his country as a nuclear-armed state and announcement of a successful satellite launch. The achievement is considered the biggest legacy that Kim Jong Il left to his son, current leader Kim

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Jong Un. Based on such a legacy, Kim Jong Un conducted the third nuclear test and successfully launched an artificial satellite and was able to refer to the North as a nuclear-armed state in its constitution.15 Therefore, this process is meaningful in that in 2012, by declaring North Korea as Kangsong Taeguk (a prosperous and powerful state), the Kim Jong Un regime completed a task that had been left unaddressed during the Kim Jong Il era. At least in terms of the political and military aspects, Kim Jong Un is considered faithful to “succession” rather than “innovation.” As the crisis of the 1990s was to some degree brought under control, North Korea began aggressively to seek ways to improve external conditions for economic development. In terms of economic development Kim Jong Il is believed to have intended to end his country’s international isolation through the normalization of ties with the United States and strengthening of economic cooperation with South Korea and China. This appeared to be close to realization in 2000 with the first inter-Korean summit, implementation of some cross-border economic cooperation projects (e.g., Mount Kumgang, the Kaesong Industrial Complex), the creation of a politically peaceful relationship with the United States, and measures to reform itself and open its doors on a limited basis. From 2008, however, inter-Korean relations began to worsen with the inauguration of the Lee Myungbak government, bringing economic cooperation between the two Koreas to a standstill. In this environment, North Korea sought to bolster economic cooperation with China as a new breakthrough. Kim Jong Il made nine state visits to China, including those made in his capacity as successor to his father, state founder Kim Il Sung, with four of the visits made from 2010 until just before his death in 2011. During the China visit of May 2010, Pyongyang signed a five-point agreement on political and economic cooperation with Beijing, a move influenced by China’s changed policy toward the North following its nuclear test of 2009. The agreement served as an important opportunity to cement economic cooperation between the two countries. In October of that year, Chinese premier Wen Jiabao visited North Korea, providing a chance to further economic and amicable cooperative ties between the two nations. The North then made a concerted effort to address economic development through cooperation programs and the joint development of special economic enclaves with China. This became an important watershed in strengthening economic cooperation between the two countries as it coincided with China’s plan to develop its Changchun, Jilin, and Tumen areas. As the reform measures of 2002 regressed to some degree and the currency reform of 2009 failed to bear tangible fruit, North Korea began to make improving its people’s living standards a key economic issue. It also practically adopted an economic development policy centered on agriculture

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and light industry while maintaining the policy of “developing the defense industry first and simultaneously developing agriculture and light industry later,” a key economic policy of the Songun era.16 This means the North prioritized solving its food-supply problem and increasing the production of daily goods. Pyongyang also continuously sought to change its economic policy while continuing the policy of pursuing practical interests. Starting in 2008, it officially declared reviving its economy as the most important state task, setting the economy as “the main line of attack.”17 This economy-centered policy is different from the North’s past economic policies in that it pursues economic development centered on food production and consumer goods. The new policy also aims to deal with international economic sanctions against the country, through cooperation with China. In his last years, Kim Jong Il gradually increased the frequency of his on-site inspections of economic areas, shifting from the previous pattern of focusing on military units. However, the transfer of various business rights from the Workers’ Party and the military to the cabinet did not go smoothly because of the military-first policy. Despite the regime’s emphasis on the cabinet’s role as the top authority in charge of the economy, the military’s strong involvement in the economy persisted in reality, partly causing inefficiency in economic management. This kind of problem is fundamentally hard to solve unless the problem of “security” is settled. Therefore, a certain portion of the state resources had to be allocated to the “security” field, and various privileges had to be ensured for those engaged in the field. The North’s transfer of militaryacquired technologies to the civilian sector (including computer numerical control technology) and of military-related trade companies to the cabinet, as well as the mobilization of soldiers to construct large-scale power plants (for instance, the Huichon Power Plant) just before Kim Jong Il’s death, were all intended to make the cabinet the practical control center of the economy. This policy might have achieved progress, but the fundamental problem remained unsolved because this process was directly linked to privileges of the party, the military, and some bureaucrats. The purge of Jang Song Thaek is believed to have taken place in the middle of this process. Kim Jong Il’s task of improving the people’s livelihoods in his later years was fully transferred to Kim Jong Un. Kim Jong Il left behind the basis of North Korea–China economic cooperation, strengthening practicalism and the partial transfer of military technologies to the civilian sectors, but they were the legacies of “development,” which was still hampered by security needs. This was also a half-century-old dilemma of the North. To solve this, a landmark change in the “security” problem was required. One of the solutions was to consolidate the North’s status as a nuclear-armed country—one of the reasons behind its third nuclear test of 2013. In other

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words, the North wanted to fulfill instructions left by Kim Jong Il and attain “security for development.” Kim Jong Un’s State Strategy: Security for Development With the sudden death of Kim Jong Il in 2011, a swift process to transfer power to his son Kim Jong Un took place. Kim Jong Un had been appointed as supreme commander of the North Korean military by the Politburo of the party on December 30, 2011. Unlike his father, who shunned publicity, Kim Jong Un made a public speech in April 2012 during a national meeting to mark the 100th anniversary of the birth of his late grandfather, founder of North Korea Kim Il Sung.18 In the address, he pledged to carry on faithfully the military-first policy. He also vowed to make improving the people’s living standards his top priority, which began to focus more on the economy in the last years of the Kim Jong Il era. In addition, the declaration that the North could build a powerful nation if “an industrial revolution in the new century [took] place for strong military power” was a reflection of its confidence as a nucleararmed state and an expression of its desperate need to concentrate efforts on the economy and make tangible results in improving its people’s living standards. In the speech, Kim vowed to “never make the people tighten their belts again,” indicating how much importance he placed on improving the people’s living standards. However, his claim that in order to improve the people’s living standards, the country should first have a peaceful external environment, requiring a stronger military power, indicates that the military-first policy is the base for economic construction. He also emphasized that his country could not give up its “sovereignty” despite the importance of peace. His remark that “nuclear powers are unable to safeguard even the peace and stability of countries under their own nuclear umbrellas” clearly shows Pyongyang’s emphasis on the sovereignty issue. In particular, the Libyan crisis appears to have had a decisive influence on the North’s view.19 A series of military provocations, such as the North’s botched attempt to launch an artificial satellite in 2011, the successful test firing of the Gwangmyongsong 3-2 satellite in 2012, and the third nuclear test in early 2013, support Kim Jong Un’s message from his speech on April 15, 2012. Kim Jong Un continued to pursue his military-first policy to develop the North’s economy while fulfilling and carrying out the instructions of the late North Korean leader Kim Jong Il. The nuclear test and successful satellite launch amounted to a display of the country’s strong nuclear deterrence externally and confidence in its regime internally.20 After the success of the nuclear test, North Korea’s news media stressed that “no nuclear-weapon

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state in the world has ever been invaded,” and the country could now focus its efforts on its economy based on its strong nuclear deterrence.21 Although the North suggested its military power was the number one condition for creating a peaceful environment, such an environment could not be created solely with military power and eventually required an improvement in external conditions, such as relations with the United States and South Korea. However, because of its nuclear and missile tests, its relations with the United States and South Korea deteriorated. Nevertheless, internally the North began encouraging efforts for economic development based on the nation’s nuclear deterrence and was found to have conducted a series of economic reform measures. Still, “security” took the top priority, and the North continues to present bolstering its deterrence based on nuclear weapons and missiles as the top state issue. The North’s dilemma can be simply summarized by two objectives: succession of its military-first policy and improvement of the people’s living standards. North Korea’s Byongjin policy, finalized in 2013, was an expression of the dilemma facing the country and could be seen as an official declaration of its plan to push for economic development, based on the military-first policy.22 What happened to Jang Song Thaek during this process can be understood against this backdrop. He was accused of challenging the country’s monolithic ideological system and disobeying orders from the supreme army commander, according to the North’s news media. However, more specifically, he opposed the transfer of various business rights to the cabinet and wanted to put some rights under his direct control.23 This constituted a violation of the principle that the cabinet should take over all business rights and the principle of efficiently allocating resources for economic development. Initially a political issue, the Jang Song Thaek incident is believed to have snowballed to become a serious problem that could not be ignored— his act of igniting feuds over business rights violated the principles of state management set under the North’s state development strategy and thus constituted disobedience of the supreme commander. As mentioned above, the idea of pursuing both “security” and “development” was formalized in the Byongjin policy of pursuing economic and nuclear weapons development at the same time. However, the Byongjin policy, introduced in 2013, is different from the one adopted in 1962 in some respects. First, the Byongjin policy of the 1960s was a consequence of the rapid deterioration of external conditions (e.g., the Cuban Missile Crisis of 1962), the confusion experienced by socialist countries, the intensification of the Cold War, and the appearance of the Park Chung Hee administration in South Korea after the May 16 military coup in 1961. This caused a serious security crisis in North Korea, which depended heavily on the USSR and China to maintain its security. It eventually had no other

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option but to adopt a strategy of injecting part of its resources into defense spending to reinforce the army. The North’s defense spending, accordingly, once accounted for 30 percent of the entire national budget (see Table 4.1). The Byongjin policy of that time resulted in reversing advances in economic development to some degree, and the North Korean economy finally began to tilt gradually toward a path of low growth at that time.24 In contrast, today’s Byongjin policy requires no increase in defense spending (see Table 4.2). Actually, the percentage of the North’s national budget spent on defense has remained almost unchanged from 2004 to 2020; it did not change even after Pyongyang declared the Byongjin policy in 2013. The policy is being pushed through without an “additional burden for defense spending,” as announced by the North.25 In addition, the political situations across the world are not as serious as they were in the 1960s, despite the deadlock in North Korea’s relations with the United States and South Korea. Therefore, today’s Byongjin policy indirectly reflects the North’s dilemma in resolving the internal problem of efficiently allocating resources and simultaneously settling the problems of “security” and “development,” rather than the seriousness of international political situations.

Table 4.1 Year

1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

North Korea’s Defense Spending, 1970–2020 Defense Spending (DS) (US$100 million) 7.31 9.1 16.2 16.2 19.91 — 13.7 4.6 8.1 — — — — — — — — — —

DS/GNI (%) 22.7 14 12 9.3 11.65 — 8.2 1.9 3.1 — — — — — — — — — —

DS/Government Spending (%) 37 17.2 15.4 14.4 12 — 14.3 15.9 15.8 15.8 15.8 16.0 15.9 15.9 15.8 15.8 15.8 15.8 15.9

Sources: Sejong Institute, Tonggyero Boneun Nambukhan Byeonhwasang Yeongoo; Choi, Bukhan Choigoinminhoieui Je14gi Je4cha Hoieuibunseok. Note: DS and DS/GNI data from 1970 to 2010 are from the Sejong Institute, but these data between 2011 and 2020 are not available.

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Table 4.2 Year

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

North Korea’s Defense Spending After 2004 (as percentage of national budget) Defense Budget (%) 15.6 15.9 16 15.7 — 15.8 15.8 15.8 15.8 16 15.9 15.9 15.8 15.8 15.8 15.8 15.9

Source: Based on data released by the North’s Supreme People’s Assembly. Note: The rate of the defense budget is based on actual performance.

Second, while the nature of the Byongjin policy of the 1960s was defined by military competition mainly through conventional weapons buildup, the North no longer pursues such an arms race under today’s Byongjin policy. It instead focuses on nuclear deterrents as part of the North’s asymmetric strategy. This typically is based on the deterrence theory that assumes overwhelming nuclear weapons capability on both sides will inhibit war.26 During a meeting of the Party Central Committee, convened to adopt the Byongjin policy, the North stressed, “Countries that possess nuclear weapons have not been invaded” and claimed this proves the power of nuclear deterrence.27 In fact, North Korea showed confidence in addressing the security problem after its nuclear tests of 2006 and 2009. After the nuclear test of 2013, it declared its confidence in its security and vowed to focus on defending itself through nuclear deterrents and improving its economy. This can also be seen in the fact that the North presented resolving the food-shortage problem and increasing the production of consumer goods, mostly from light industry, as the most important goals, even after the Byongjin policy was declared. According to the annual national budget plans announced by the Supreme People’s Assembly, the economic budget has been steadily increasing since 2004, with the Byongjin policy in place, and now accounts for more than 40 percent of the national budget. This shows the North is focusing its national resources on revitalizing its economy despite the Byongjin policy.

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Although the North maintains its Byongjin policy, no increase in defense spending has been spotted. Rather, the economic budget has been on a steady rise, and, most recently, remarkable economic reform measures have been implemented internally or as a test run. Based on figures from the Supreme People’s Assembly, Table 4.3 shows the percentage changes in the North Korean cabinet’s allocation of its total budget to economic development. The economic budget announced by the North has hovered above 40 percent since 2004, after jumping from 23.3 percent in 2003. In 2013, the year when the Byongjin policy was announced, the rate exceeded 45 percent. As mentioned above, spending on economic development has increased, while defense spending has remained almost unchanged at about 16 percent. This phenomenon indicates that today’s Byongjin policy is being carried out without additional defense spending, as claimed by the North. This phenomenon can also be found in a series of changes to the North’s economic policies and management of the economy. Pyongyang is practically stepping up its concentration of economic resources in the cabinet, a principle that has been emphasized since the Kim Jong Il era, and the cabinet is gaining more access to economic sites with the introduction of regular “field surveys” by the premier of the cabinet.28 In 2012, the North enhanced the autonomy of factories and companies, incentives for the agricultural sector, and new economic reform measures, known as the “June 28 Measures.” North Korea is known to be currently expanding the measures to other fields after a trial run.29

Table 4.3 Year

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

North Korea’s Economic Development Budget Allocation Spending on Economic Development (%) 23.3 41.3 41.3 40.3 — — — — — 44.8 45.2 46.7 47.5 48.3 47.7 47.6 47.7 45.3

Source: Based on data released annually by the North Korean People’s Supreme Assembly.

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Such a move by the North appears to be aimed at solving its two problems—“security” and “development”—at the same time. However, more precisely, this is interpreted as a move more intended to attain “security for development” rather than the reverse, because security here is not a goal in itself but a precondition for stable development. Thus, for them, possession of nuclear weapons is understood as “the best means of economic development.”30 The North’s “security” and reinforcement of its nuclear deterrents is of a defensive nature, not a product of an expansionist policy. Therefore, the North emphasizes the importance of a “tit-for-tat” response, typical of nuclear deterrence theory: “If the imperialist grabs a nuclear weapon, we should do the same; if it possesses international ballistic missiles, we should do the same; and if it threatens us with a space weapon, we should threaten our enemies with a space weapon.”31 They have more need of obtaining “deterrence” through nuclear weapons, not “nuclear weapons” themselves. Despite the Byongjin policy, the North is implementing a few measures with a focus on economic development. First, the North has made agriculture its top priority, emphasizing the need to resolve completely its inadequate food supply. The North’s chronic shortage of food is believed to have considerably improved during the 2012–2013 period. According to estimates by international organizations, North Korea’s food production increased 5 percent to about 5.3 million tons in 2013.32 This appears to be the result of Pyongyang’s intensive investment in agriculture and nationwide efforts to increase production following the launch of the Kim Jong Un regime. This appears to have something to do with Pyongyang’s recent decision to give more leeway to farmers, withdrawing its “top-to-bottom” guidance in agricultural matters.33 It appears to be related to Pyongyang’s recent decision to allow cooperative farms to choose the types of crops and products they grow and make based on their own conditions and regional features. This is a departure from the past juche agricultural method, under which the upper authority dictated which crops should be grown and products produced. In a related report, the Choson Sinbo, voice of the pro-Pyongyang Korean residents’ organization in Tokyo, said, “The ‘people’s politics’ of the Kim Jongun era focused on resolving the people’s food problem first.” The newspaper cited the introduction of new economic management systems, including a system for subdividing units into cooperative farms and allowing members of the subunits to take charge of vegetable fields. The new incentive system promises farmers who cultivate vegetables in state-owned fields, in addition to their given work at cooperative farms, a certain percentage of harvests from the fields. In addition, among the newly introduced systems cited were the distribution of harvests in kind rather than cash and elevation of the government’s grain-purchasing prices closer to market prices.34 Second, more changes are expected in the North’s methods of managing agriculture and the economy, which are already being tested. The

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changes will likely come in the form of combining leadership of the central government and autonomy of provincial authorities. Systems already on trial, including those for giving more autonomy and power to companies and improving the distribution system (in agriculture and related industries), are highly likely to be expanded further. In 2013, North Korea called on the people to “widely spread know-how gained in various economic fields.” The North went further the following year by raising the need to “decisively improve its way of guiding and managing economic development projects.” From these remarks, the North is expected to focus more on furthering such new economic management systems already in place.35 It is worth considering whether North Korea will continue to develop the special economic zones designated in 2013 despite the purge of Jang Song Thaek. Jang had exerted considerable influence on economic cooperation projects between North Korea and China. Whether Pyongyang continues developing the new economic zones is an important indicator of the future path of North Korean economic policies. Until now, there has been no conspicuous halt or change to programs to develop special economic enclaves and cooperation projects with China. In particular, no readjustment or other changes were sensed in the development of the Rason economic zone, the North’s coal mine exports, and the North Korea–China joint projects to develop the North’s border areas, programs reportedly all led by Jang.36 This means there will be no major change in the economic cooperation projects between the two countries, although the speed of the programs might slow down.37 In summary, North Korea is eventually expected to accelerate efforts to resolve its food-shortage problem and increase production of consumer goods, placing the cabinet at the center of economic management while stepping up cooperation projects with China, mainly as a way of jointly developing the North’s special economic areas. In addition to this, the North is expected to continue to ensure more autonomy and joint power in its internal system for economic management. These measures show that the Kim Jong Un regime’s top priority of improving the people’s living standards is being addressed, despite its succession of the military-first policy. That is “security for development.” This explains why the North said, “We have been confidently moving ahead, allocating more human and material resources to the economic construction based on our firm military superiority since the Byongjin policy was formalized.”38 Conclusion The North has focused on nationwide efforts to “develop” its economy while pursuing “security” based on possessing a nuclear deterrent. This can

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be described as the North Korean version of “catching two hares at once,” and this idea was formalized as the Byongjin policy. This situation remains today. Through the comparative study of Kim Jong Il and Kim Jong Un’s Byongjin policies, we argue that the Byongjin policy of simultaneously pursuing economic development and the reinforcement of nuclear armament adopted by the Kim Jong Un regime in 2013 is different from Kim Jong Il’s Byongjin policy, in that the former’s prioritizes economic development. The difference between Kim Jong Il’s and Kim Jong Un’s Byongjin policies, we argue, comes from changes in the operational environment whereby the North secured certain confidence through the artificial satellite test launch of 2012 and its third nuclear test of 2013. Based on such confidence, Kim Jong Un is now trying to initiate full-scale measures to improve the North’s economy. In this sense, we conclude that if the Kim Jong Il era of the 1990s was characterized by its pursuit of “development for security,” Kim Jong Un seeks “security for development.” The Kim Jong Un regime’s Byongjin policy has multiple significances. First, it is aimed at addressing the pending problem of having to pursue development based on security. Second, creating peaceful external environments emerged as the most important diplomatic strategy. Under this strategy, North Korea has made active diplomatic moves toward China, Russia, Japan, and European and Middle Eastern countries, departing from its past of concentrating mainly on diplomacy with the United States and South Korea.39 Lastly, the North is also actively pushing for changes in its internal economic system. Making the cabinet the top authority in charge of the economy, giving more autonomy and power to individual companies, the active use of marketplaces, the joint development of special economic zones with China, and the revitalization of tourism and other businesses to attract foreign money are all considered to be important experiments in economic reform. More changes are expected in North Korea’s domestic economy in the future. This study has limitations. As only a short period has elapsed since Kim Jong Un’s succession in 2011, the main finding of this chapter—that the Byongjin policy of the Kim Jong Un era is different from his predecessor, Kim Jong Il’s—is drawn from a relatively weak evidence base. The largest security dilemma facing the Kim Jong Un regime is still unsolved; therefore, unless ties with the United States are normalized and interKorean relations improved, it will be difficult for the Kim Jong Un regime to also maintain its revised version of the Byongjin policy that prioritizes economic development. It is possible that the current confrontational diplomatic relationship between North Korea and the United States and other changes in the operational environment surrounding North Korea will result in it returning to a Byongjin policy that prioritizes security as a means to address the dilemma.

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Notes 1. This chapter is based on Chung, Kim, and Moon, “State Strategy in the Kim Jong-un Era.” 2. Rush, How Communist States Change Their Rulers. 3. Lee, “Kim Kong-un Chejeeui Gwonryeokgoojowa Hyanghoo Jeonmang”; Kim, “Bukhan Gwonryeokseunggye Damron Yeongoo”; Hong, “Kim Jong-ilgwa Kim Jong-uneui Tongchi Style Bigyo.” 4. Jung, “Kim Jong-un Chejeeui Gyeongjegeonsulgwa Haekmooryeokgeonsul Byongjin Nosun Pyeongga.” 5. Kim, Olhae Dang Saŏpeseo Hyŏngmyŏngchŭk Chŏnhwanŭl Irŭkilde Dehayŏ; Park, Pyŏngyangeseo Bon Bukhansahoi. 6. Jung, “Kim Jong-un Chejeeui Gyeongjegeonsulgwa Haekmooryeokgeonsul Byongjin Nosun Pyeongga.” 7. Rush, How Communist States Change Their Rulers. 8. Hwang, “Kim Jong-un Sidae Bukhaneui Daeoijeonryak”; Lee, “Kim Jonguneui Gyongje-Haekmooryeok Byongjinnosuneui Teukjinggwa Jisok Ganeungsung”; Jung, “Kim Jong-un Chejeeui Gyeongjegeonsulgwa Haekmooryeokgeonsul Byongjin Nosun Pyeongga”; Kwon “Kyungjewa Haek, Doo Mari Tokki Japeul Ganeungsung Heebak.” 9. Jung, “Kim Jong-un, Bukhaneui Deng Xiaoping eul Kkumkkunda.” 10. Lee, “Kim Jong-un Cheje Ihoo Bukhan Gyeongjejeongchaekgwa Byeonhwa Ganeungseung”; Jo, “Gyeongje·Haek Byongjinnosuneui Euimiwa Kim Jong-un Sidaeeui Gyeongjejeongchaek Jeonmang.” 11. Rush, How Communist States Change Their Rulers. 12. Kim, Sonchip 14, 225; Cho, “Sŏngunhyŏngmyŏng Yŏndoro Sahoejuŭi Chipkwŏndang Kŏnsŭlesŏ Irukan Pulmyŏleŏpjŏk”; Kim, “Widaehan Ryŏngdocha Kim Jong-il Dongjiŭi Sŏngunchŏngch’inŭn Sahoejuŭi Kyŏngche Kangguk Kŏnsŏrŭi Kyŏltsŏngjŏk Dambo,” 6–8. 13. Im, P’ismeikŏ. 14. Korea Statistics, “Pukan Tongye,” The Bureau of Statistics of Korea. 15. North Korea, “2012 Pukan Hŏnbŏp.” 16. North Korea, “2005–2014 Pukan Sinnyŏnsa.” 17. North Korea, “2008 Pukan Sinnyŏnsa.” 18. Kim and Kim, Changunŭi Sŏnkun Chŏngchi. 19. Kim, “2012nyŏn 4wol 15il Yŏnsŏl”; Jung and Chae, “Uri Dangŭi kyŏngche Kŏnsŏlkwa Byungjinrosŏnŭn Hanguchŏgin Rosŏnida.” 20. “Kyŏnaehanŭn Kim Jong-un Dongchikkesŏ Chosŏnnodongdang Chungangwiwŏhoe 2013nyŏn 3wol Chŏnŏnwiwonhoesŏ Hasin Pogo,” Rodong Sinmun. 21. “Uriŭi Haek ŏkchiryŏkŭn Chachukkwon Suhorŭlwihan Chŏngŭiŭi Pogŏm,” Rodong Sinmun; “Kyŏnaehanŭn Kim Jong-un Dongchikkesŏ Chosŏnnodongdang Chungangwiwŏhoe 2013nyŏn 3wol Chŏnŏnwiwonhoesŏ Hasin Pogo”; Chong, Gŭlobŏl Amagetdon, 51. 22. Cho, “Kim, Jong-un Ch’echeŭi Daeoe Kaebang Choch’I Pyŏkawa Chŏnmang.” 23. North Korea, “2013nyŏn 12wol 8ril Chŏngch’Ikuk Kyŏltsŏlsŏ”; North Korea, “12wol 13mil Jang Song-taek Pankyŏlmun.” 24. Kim, Chŏchak Sŏnchip 6, 75; Yang, Pukan Kyŏngcheŭi Kucho. 25. Li, “Uri Dangŭi Saeroun Byŏnchinrosŏnŭi Chŏngdangsŏng”; “Kyŏnaehanŭn Kim Jong-un Dongchikkesŏ Chosŏnnodongdang Chungangwiwŏhoe 2013nyŏn 3wol Chŏnŏnwiwonhoesŏ Hasin Pogo,” Rodong Sinmun.

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26. Buzan and Hansen, The Evolution of International Security Studies, 25; McWilliams and Piotrowski, The World Since 1945, 507. 27. Li, “Saeroun Byŏnchinrosŏnŭn Panmichŏnmyŏndaekyŏltsŏnesŏŭi Ch’oehusŭngriŭi Dambo.” 28. Kim, “Widaehan Kim Jongil Dongchirŭl Uridangŭi Yŏngwonhan Chongbisŏro Nopimosigo Chuchehyŏngwiŏpŭl Pitnage Wansŏnghenagaja.” 29. Kim, “Puk, Chayulkyŏngyŏngkkwon Chŏnmyŏnhwa Han ‘5.30 Chochi’ Hwakindwae.” 30. “Byŏnchinŭi Posŏngul Imyŏapro,” Rodong Sinmun. 31. Dong, “Sigani Chŭngmyŏng Hhal Kŏsida.” 32. “Buhan Olhae Sikryangsaengsan 5% Neulŏ, 3nyŏn Chungga,” Nocut News. 33. “Nongeop Bunjojang daehoewa Pojŏndamdangje,” Tongil News. 34. “2014 Sinnyeŏnsaga Yegŏhaneun Saerŏeun Biyak-Kim Jong-unsidae Inminjeŏngchieui Jeŏnmyeŏnguhyeŏn,” Choson Sinbo. 35. Chong, “Kim Jong-un Ch’echeŭi Kyŏchekŏnsŏlkwa Haekmuryŏk Kŏnsŏl Byŏngchin Nosŏn Pyŏngkka.” 36. North Korea, “12wol 13mil Jang Song-taek Pankyŏlmun.” 37. Hwang, “Malonŭn Daepukchechae Chungkuk, Algopomyŏn Tuja Tongnyŏ,” 36–39. 38. “Dangŭi Byŏngchinnosŏnŭl Nopipattŭlgo Kangsŏngkuka Kŏnsŏlŭi Ch’oehu Sŭngnirŭl Apddangyŏ Nagacha,” Rodong Sinmun. 39. Yee, “Kim Jong-un Ch’eche Chosŏnnodongdang Chŏnch’aekŭi Pyŏgawa Chŏnmang,” 112.

5 Cooperation with South Korea Hyo-young Lee

The history of economic cooperation between South and North Korea goes back over thirty years, as inter-Korean trade began in 1989 and started to grow in earnest in 1991. Humanitarian assistance to North Korea was first provided in 1995 as the severity of North Korea’s economic crisis became known to the world in the aftermath of a devastating flood. In the initial stages, assistance to North Korea took more indirect forms, as it was provided through international organizations and delivered sporadically in smaller quantities. Later on, humanitarian assistance grew in size as the South Korean government launched initiatives on a larger scale after the inter-Korean summit meeting in June 2000. As inter-Korean economic relations are inherently vulnerable to military and political events on the Korean Peninsula, all inter-Korean exchange has eventually stopped after a series of military provocations by North Korea in 2010. The “May 24 Measures,” adopted by the South Korean government in response to North Korea’s provocative acts, banned all inter-Korean trade, development assistance, and investment projects in North Korea, with the Kaesong Industrial Complex (KIC) project being the only exception. Eventually, KIC operations were also terminated in the aftermath of North Korea’s missile tests in 2016. To date, inter-Korean economic cooperation has been fraught with profound difficulties, such as the economic sanctions imposed by the United Nations and major economies against North Korea. In addition, North Korea is adamant about sustaining its authoritarian regime and maintaining the current course of using nuclear capabilities to demonstrate its will, and it is steadfast in its lack of enthusiasm for receiving humanitarian assistance from its South Korean counterpart and its insistence on furthering its deep

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economic relations with China. All these factors formed pressure against inter-Korean trade and are detrimental to the rebuilding of inter-Korean economic relations. The United Nations and major economies are also reluctant to resume active development assistance to North Korea due to the lack of transparency in the regime’s distribution of international assistance. At present, there seems to be no practical solution from either of the two Koreas to resolve this seemingly deadlocked situation. As a result, alternative means to induce North Korea to break the current stalemate are attracting increasing attention—such as applying the peace-development nexuses based on the UN concept of “sustaining peace,” which seeks to realize the synergy of achieving economic development and the state of peace at the same time. There has also been an increase in the emphasis placed on capitalizing on the accession of conflict-stricken least-developed countries to the World Trade Organization (WTO) as a means to initiate the process of institutional change and restructuring that enables sustainable economic growth. South-North Korea Trade and Economic Cooperation Inter-Korean trade started in 1989 at less than US$20 million in volume and began to grow in earnest from 1991, after the South-North Korea Exchange and Cooperation Act and South-North Korea Cooperation Fund Act were enacted by the South Korean government in August 1990.1 While there were ups and downs in the bilateral trade volumes as the inter-Korean relationship reacted sensitively to provocations by the North and fluctuating economic conditions in both countries, the overall bilateral trade volume grew exponentially from US$112 million in 1991 to reach its peak of US$2.71 billion in 2015 (see Figure 5.1). After showing an upward trend for over twenty years, inter-Korean trade volumes plunged in 2013 to US$1.1 billion, almost equivalent to the 2005 trade levels following the South Korean government’s announcement of the imposition of sanctions against North Korea on May 24, 2010 (the so-called May 24 Measures) in response to North Korea’s naval attacks against the South Korean Cheonan warship in March 2010. After recording a sharp rebound in trade volumes in 2014 and 2015, however, bilateral exchange plummeted to US$333 million in 2016. To date, especially since the closing of the KIC, inter-Korean economic exchange has been almost nonexistent since 2017. During the 1990s, inter-Korean exchange mainly took the form of private-sector investment in North Korea made by several South Korean companies. South Korea’s legislation of the South-North Korea Exchange and Cooperation Act and South-North Korea Cooperation Fund Act in 1990, as well as the announcement of a series of measures aimed at pro-

Cooperation with South Korea

81

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Source: Data on fertilizer output and South Korea fertilizer aid based on National Statistics Office, Major Statistics of Korean Economy (several issues); data on import from China taken from United States Department of Agriculture (USDA) Foreign Agricultural Service, DPRK (January 21, 2020).

104

Tat Yan Kong

Figure 6.5 North Korea’s Grain Output, Import, Aid, and Total Availability, 1990–2019 *!" )!"

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Source: CEIC Database, 2022, https://www.ceicdata.com/en.

218

Min-Hua Chiang

or canceled payments, belated deliveries, inferior product quality, and attempts to renegotiate agreements.38 North Korea’s greater trade reliance on China after 2000 is a result of its deteriorating relations with other trading partners, notably Japan and South Korea. The Japanese government ended all bilateral economic activities after North Korea admitted the kidnapping of Japanese citizens.39 Inter-Korea trade was largely developed after the establishment of the Kaesong Industrial Complex (KIC) in North Korea in 2003. North Korea imported intermediate goods from, and exported the final consumption goods to, the South after final assembly in the KIC. Several hundred South Korean firms located in the KIC contributed to North Korea’s domestic employment and trade development.40 However, bilateral trade fell after the South Korean government forbade trade with the North following the sinking of the South Korean naval ship Cheonanham in 2010.41 As shown in Figure 12.2, China’s significance in the DPRK’s external trade grew especially quickly after Kim Jong Un took office. From 2011 to 2019, around 70 to 80 percent of North Korea’s external trade was with China compared to around 30 percent during the 1980s and 1990s. This is a considerable growth. North Korea’s external trade has sharply declined since 2017, when China enforced UN sanctions. In August 2017, China announced it would follow the UN sanctions order and ban on North Korean coal, iron, seafood, and other imports following President Xi Jinping’s phone conversations with US President Donald Trump.42 DPRK conducts most of its merchandise trade with China’s northeast region. Dandong, a Chinese city located on the western border of North Korea, has handled most of the trade between the two countries.43 North Korea’s bulk trade with China has been driven by imports from, rather than exports to, China.44 As such, North Korea has run a constant trade deficit vis-à-vis China. The trade deficit has largely expanded since 2000. Items traded between the two countries show how China has supported North Korea’s economy. Mineral and chemical products are the DPRK’s main export items to China. However, North Korea’s exports of mineral and chemical products to China have started to decrease since 2014 (see Figure 12.3). This decline started even before UN Resolution 2270 in 2016 banning North Korea from exporting mineral products. While the DPRK’s exports of mineral products deteriorated, its exports of plastic, leather, textile, and other manufactured goods started to grow clearly from 2013 to 2017. The structural changes of North Korea’s exports from minerals to light manufactured products indicate that the country has started to develop light industries to boost its economy instead of relying on exporting natural resources alone. China’s market for North Korea’s exports of textiles and footwear allowed the latter to develop the light industries to energize its domestic economy.

The Limitations of UN Sanctions

219

Compared to its exports, North Korea’s imports from China are more diversified (see Figure 12.4). North Korea has relied on importing agricultural, light manufacturing, and heavy industrial goods from China. Those imports remained strong from 2011 to 2016. On the other hand, the imports of mineral and chemical products have decreased clearly since 2015. North Korea’s strong demand for light and heavy industrial goods from China implies China’s significance in supporting the DPRK’s manufacturing production. Despite China’s sanctions enforcement, the DPRK’s imports of Figure 12.3 North Korea’s Main Export Items to China, 2011–2019 #(!!!" '(&!!"

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Source: Korean Statistical Information Service (KOSIS). https://kosis.kr/eng/.

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