North Korea: a story of isolation

Tensions in Asia have been rising sharply as North Korea continues its missile testing in defiance of US demands for them to cease. President Trump has been upping the ante with threats to by-pass China and the stalled so-called six party talks supposedly working out a ‘peace solution’ with North Korea, and ‘deal with’ North Korea on its own.  As US naval battalions enter Korean waters to impose Trump’s will on North Korea, I thought it might be worth looking at the state of the North Korean economy.

The end of the Korean war in the early 1950s left Korea with over one million dead and still divided in two in the same way that the ‘cold war’ between the US and the Soviet Union left Germany split in two.  Both parts of Korea were poor, but interestingly it was the south that was poorer because most of the natural resources (coal etc) and industry were in the north, although the mines were mostly destroyed.

That changed in the ensuing decade or so.  Huge amounts of foreign investment were ploughed into the south where a military regime was imposed, keeping wages to the minimum and establishing large monopolistic corporations (chaebol) heavily integrated into the state machine.  Investment was state-directed and the profitability of capital rose sharply through massive exploitation of labour.

Meanwhile in the north, the one-party state machine, resting on a nationalised industry and farms and built in the image of its mentors, Russia and China, received no such investment support as in the south.  In 1961 an ambitious seven-year plan was launched to continue industrial expansion and increase living standards, but within three years it became clear this was failing. The failure was due to reduced support from the Soviet Union when North Korea aligned more with China, and military pressure from the US, leading to increased defence spending.

In 1965 South Korea’s rate of economic growth exceeded North Korea’s for the first time and in most industrial areas, though South Korea’s per capita GNP remained lower than North Korea’s. North Korea did recover somewhat under its national plan, but by the early 1970s, per capita income in the south exceeded that of the north for the first time and the gap then accelerated.

North Korea’s planned economy struggled with its isolation in trade and investment; the lack of support from Russia and China (which had their own problems); and the stifling totalitarianism of the Kim dynasty, now firmly ensconsed as the ‘great leader’ (one after the other).  The south had its own autocratic regime with no democratic rights, but at least it had trade and investment to exploit its people more effectively.

The collapse of the Soviet Union presaged an unprecedented disaster for the North Korean economy.  Weighed down by heavy military spending to defend the regime, the disappearance of its export markets for coal and other minerals led to a collapse in industrial output.  This was accompanied by terrible harvests, leading to a major famine that saw 500,000 to nearly a million deaths!  Living standards fell by half as the average real GDP growth rate in the 1990s was -4%!

In 1999 the economy showed some signs of recovery. And the Kim regime decided to mimic the ‘reforms’ introduced in China to allow some private sector production and some markets in agriculture and for small businesses.  There has been steady if low economic growth since the late 1990s, even if the country is still the poorest in East Asia. During the period 2000-2005, the North grew at an average growth rate of 2.2 percent. There was a downturn yet again in the global Great Recession and from 2006-2010, only 2008 registered positive growth. But since 2010, North Korea resumed some growth again.

North Korea continues to depend on getting foreign currency to import goods by selling coal to China (one-third of all exports). In addition, the regime sends thousands of North Korean workers in forced labour conditions to China, Russia and the Middle East to work in mining, logging and construction to remit foreign currency.

Estimating GDP in North Korea is a difficult task because of a dearth of economic data and the problem of choosing an appropriate rate of exchange.  In 2014, the South Korea-based Bank of Korea estimated that the real GDP of North Korea in 2014 was KRW 4.2 billion  or just 1/44 of the size of the South Korean economy.  However, it is probably an underestimate of the North Korean economy. GDP per person was KRW1.388 million, or just one-20th of the average in South Korea.  This is a mighty huge gap.

A significant part of the population is still malnourished and the average North Korean family considers itself reasonably affluent if they can afford a new bicycle.  However, this year, North Korea enjoyed an exceptionally good harvest, which for the first time in more than two decades will be sufficient to feed the country’s entire population.  Ironically, in this year of possible attack by the US and the sabre-rattling of the Kim regime, the economy is growing around 3-4% a year, a record level since the 1970s.

The government appears to have allowed the private sector to grow.  Some ‘state companies’ are in effect owned by rich individuals, usually well-placed or related to senior state officials.  According to the most recent estimates, about 75 percent of North Korean household income now comes not from the state but from assorted private economic activities – activities that are now tacitly tolerated by the government. North Koreans today tend to their very own private plots, run their own food stalls, make clothes, footwear (and even counterfeited Chinese cigarettes) in unofficial workshops, and of course, they trade.  Since 2010, the number of government-approved markets in North Korea has doubled to 440, and satellite images show them growing in size in most cities. In a country with a population of 25 million, about 1.1 million people are now employed as retailers or managers in these markets, according to a study by the Korea Institute for National Unification in Seoul.

So the law of value is inevitably beginning to operate and strengthen in an economy that is unable to expand through state planning run by a dynastic autocracy.  But with the law of value and markets come rising inequality, fostered by the corruption of the bureaucracy.

But even if the political tensions were to subside, there is no way that the North Korean economy can really deliver sustained economic growth and living standards for its 25m people.  The key is foreign investment and a democratic plan.  North Korea will have neither under the current regime.  First, there are US-inspired sanctions against investing in the north, while the north pursues its aim of having effective nuclear weaponry – and that aim is seen as essential by the Kim regime for its survival.

And the regime sees foreign investors as institutions to be milked not as partners in expansion.  They have not learnt from the Chinese here.  For example, the Egyptian telecommunications firm Orascom created a North Korean mobile phone network virtually from scratch, but the North Koreans not only refused to pay the Egyptians from the proceeds of the network but confiscated all the assets.  Foreign capital is not likely to come on that basis.

The obvious immediate solution is the unification of north and south.  Koreans should be united as the Germans were.  But the only option offered is, of course, unification on the basis of capitalism, not democratic socialism.  Capital would dominate in the north as well as the south – something that has proved a failure even in Germany, where the gap between east and west in living standards remains wide, despite billions being ‘transferred’ to the east and slowing expansion in unified Germany for nearly a decade.  Those living in the east have real incomes at just two-thirds of those in the west and one-third of easterners have moved to the west.

And here is the rub.  The cost of unifying north and south Korea is way more than it was to bring west and east together.  Whereas, east Germany had 17m people against 60m in the west, a ratio of one to four; north Korea has 25m against 50m in the south, a ratio of one to two.  A report from the south still reckons it would be possible to unite Korea on a capitalist basis and raise the income per head in the north to $10,000 (compared to $1800 now and $25,000 in the south) and North Korea’s economy to 70% of the south’s by 2050, making a unified Korea the seventh-largest economy in the world.

But this is really a pipe-dream.  Even this optimistic report reckons that the south would have to commit 7% of GDP every year to the north to achieve this target (compared to 4% of West German GDP to the east).  That is clearly impossible on a capitalist basis, given the increasing economic problems facing the south since the Great Recession.  As I posted only last March, South Korea goes into a general election tomorrow with its political elite mired yet again in corruption and its economy increasingly sclerotic with its monopoly chaebols and facing increasingly difficult conditions in global trade, vital to the south’s expansion. No wonder political support for unification in the south has waned in recent years.

There is strong evidence that a planned and predominantly state-owned economy could succeed and do even better in a unified Korea.  If you compare, for instance, the development of Mexico and the Soviet Union from 1913 until the year the Berlin Wall fell, “the Soviet Union’s growth over the period of communism put Mexico’s to shame,” according to Charles Kenney, a senior fellow at the Center for Global Development. He points out that Soviet income per capita was 46% greater than Mexico’s in 1989, compared to just 1% larger in 1913.  And there is the story of China’s phenomenal and unprecedented economic expansion, taking hundreds of millions out of poverty.

Unification was tried back in the 1950s through a bloody war that decimated Korea.  Unification would only be successful peacefully if there were a unified, democratically elected, regime under the control of the working class of both south and north.  It would only be successful economically if the chaebol in the south were taken over and the resources of the north were integrated into a national investment plan.  The capitalist regime of the south and the cultist dictatorship of the north would have to go before that.

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14 Responses to “North Korea: a story of isolation”

  1. Nadim Mahjoub Says:

    An interesting take. Thank you. I disagree with the only option offered although it is desirable. The regime in the North is more likely to go before the one in the south sees any fundamental change. Then there would be a unification on a capitalist basis… it would be very hard, but we don’t know by then the situation in the Western economies… In good conditions, the Western regimes would rejoice and rush to help. Another perspective is that China would step in and help the NK open up.

  2. Ben Says:

    Interesting perspective. The problem that you have is you make out like the lack of foreign investment and foreign capital, along with the low profitability of capital as the severe problems stymieing the North’s growth and then you suggest that a planned economy is the solution.

    Obviously, state running your economy will stop foreign investment from flowing in and state control would lower the profitability of capital to prevent the profitability incentives being created for people to make productive investments – whether it’s politicians, citizens or corporations.

    So you have the option of going for the South’s solution (demonstrated to work so many times) of opening markets, being incredibly open to free trade and making an unequal, but, on average, far wealthier country or you impose a communist state-run regime (because it’s incredibly hard to take people’s property democratically) on the entire peninsula and see if it works – because, after all, it worked in the Soviet Union for a few years. Not to mention the North Korean peninsula is notoriously lacking in resources whereas the Soviet Union was rich in them which was clearly a fundamental reason for its success.

  3. Henry Says:

    This is an obvious example of the short comings of Socialism in One country.

    No doubt there have been successes, China has moved more people out of poverty that almost all the other nations combined and its ‘state run’ model has performed better than the ‘market’ solutions of India,

    Of course as Ha-Joon Chang pointed out in his 23 Things They Don’t Tell You About Capitalism the most entrepreneurial societies that keep state involvement to a minimum are not the wealthier ones, but quite the opposite.

    It is still a general rule though that a socialist society in a sea of rapacious capitalists will likely struggle and that for any socialist internationalism is the only real way forward.

    A global socialist system would raise productivity and efficiency levels way beyond anything the inefficient war of all against all capitalism can deliver and in an ocean of socialist civilized societies a capitalist society would not only seem like a vulgar oddity but wouldn’t last 2 weeks before descending into internal destruction. I guess being civilized the socialist societies would actively seek to help them out!

    The problem is, and it is a whopper, how do we get from this insane system that I say no one really likes (possibly apart from Ben and the global 1%) to a system that consciously plans production and is civilized?

    Answers on a postcard please!

  4. jlowrie Says:

    Ben asserts, “So you have the option of going for the South’s solution (demonstrated to work so many times) of opening markets, being incredibly open to free trade “. Quite the opposite is true! I have even read that at one stage the South imposed the death penalty for the illegal export of capital! Well done!

    Henry says, “A global socialist system would raise productivity and efficiency levels way beyond anything the inefficient war of all against all capitalism can deliver.” How would it do this, Henry? No answers on a postcard, please!

  5. Simon H Says:

    You can’t take people’s property democratically Ben? Since we’re talking about the property of the of the capitalist class, a small minority, it should not be difficult at all. In fact a number of democratic governments that were taking capitalist property have been violently over thrown and dictatorships put in their place.

  6. Henry Says:

    “How would it do this, Henry? No answers on a postcard, please!”

    By better use of resources, it would reduce the waste of speculative production, which is a hallmark of capitalism. So the colossal waste of capitalism in a world of poverty would be significantly reduced.

    By targeting more directly human need, rather than relying on transference from say military spending to health spending, resources would be targeted more directly to actual human need, whereas capitalism targets profit and money making. Less spending on private swimming pools and more on public services.

    Reducing the number of hangers on and increasing those employed directly into productive areas. So less accountants hiding the money of the rich and more nurses caring for the elderly.

    Improve communication and reduce hostility, which stifles innovation and progress. So instead of nations stealing secrets they all work together for the common good.

    Better management of the environment, rather than the environment being a tricky afterthought it is placed front and center.

    Education systems targeted at the many and not the few. The idea being that the more ecuation society generally the better will be the outcomes, rather than primarily investing the in the wealthier and often educationally inferior students.

    Furthermore on education, inheritance will not be a mark of investment but a genuine system that matches ability and skill with tasks and roles. So for example doctors will not be identified from a narrow class of people but instead the best people for the job will be properly identified.

    There are more…

  7. Charles Says:

    “stifling totalitarianism” or “a dynastic autocracy” – not the same. Which is it?

    You give a broad background sketch with no indication of your sources, except for recent statistics from the Bank of [south] Korea.

    “The key is foreign investment and a democratic plan.” Why is foreign investment key? You can argue that the country must be able to purchase some machinery, but that is a minimum of trade, not investment.

  8. The Socialist Says:

    Let’s be honest here, no one here knows what it’s really like living in North Korea and how their economy and society is doing. All this fetishistic playing with numbers reeks of pretentious scientism and academism. The information you are referring to about the “Kim regime”, the laborers forcefully sent oversees etc is just another masterpiece propaganda campaign by the almighty hegemon. I especially love the references to some obscure “South Korean News Agency” in many news articles on North Korea.

    The US cannot and will not attack North Korea. This would be too much for them to swallow and North Korea has been one of the most stunning examples of how to defend yourself against an aggressive imperialist as a very small nation.

    • Cameron Says:

      I agree. Are there any stats on unemployment and homelessness? Actually whenever I see pictures and video clips of the country it makes me wonder what to believe. I tend to think that it’s bad but not as bad as how it is portrayed in the western media or even in this article.

  9. Wal Buchenberg Says:

    Hi Michael,
    I do not share the view that the success or the benefits of a society can be measured against economic data.

    Fourier states that “the degree of women’s empowerment is the natural measure of general emancipation.” (MEW 19, 196)

    Similarly, one can say that the degree of freedom and self-determination of the working people is the natural measure of universal freedom and self-determination in a society.

    In North Korea both, the women’s emancipation and the status of wage-earners, are miserable.

    I’m glad I do not have to live there.

    Greetings from Wal Buchenberg

  10. jlowrie Says:

    Wal Says,

    “In North Korea both, the women’s emancipation and the status of wage-earners, are miserable.”

    How does he know this? Is prostitution ripe, as in the South and some other East Asian countries? Are women dissidents systematically raped when arrested, as certainly happened in the South into the 1980’s ?Are North Korean women more subject to sexism than elsewhere?

    As for the miserable wages, they are miserable compared with those in the South, but how about compared with those in resource- rich countries like Indonesia or Nigeria?

    ”I’m glad I do not have to live there.” Me neither, but there may well be much worse places. Honduras for example; yet last year I ran into a Cuban who asserted anywhere would be better than Cuba, and he would even like to emigrate to Honduras!

    But what can one expect when even self-identified leftists repeat propaganda gleaned in the furrows ploughed by fascist propaganda. A favourite :” millions of Chinese….killed during Mao Tse-tung’s revolution…Japan was responsible for the deaths of thousands of Chinese in its brutal occupation.” ( Dave, “Crimes against Humanity” 2008) How the soul of old Hirohito must be nodding in benign satisfaction. Some Chinese put the Japanese slaughter at 35million. The Japanese rightists call this communist propaganda, just as they deny the comfort women (Soh, “The Comfort Women” 2008) , the Nanking Massacre and and the horrors of the human experiments of the likes of Unit 731 (Rees, ”Horror in the East” 2000).

    Why in the scale of things North Korea should invoke Wal’s ire is truly hard to fathom.

    • Wal Buchenberg Says:

      I know that the situation of women and those of the working class in North Korea is miserable because all my information points to it and none of my information suggests anything contrary.

      Under a miserable situation, I do not understand only the material situation, but much more the possibilities for political and social participation and the possibilities for self-determination about one’s own life and his/her own work.

      Besides, it is a really bad propaganda trick to justify a bad situation by referring to places where things are even worse.

      Wal Buchenberg

  11. Henry Says:

    I am with Wal, I would rather live in the USA than North Korea, but then again I could say that for almost every place on Earth, given the USA is a relatively wealthy place and I am white.

    Hopefully this inefficient global inequality and often inequality within the same nation will be drastically reduced under a socialist system. Though I accept there is an historical/geographical dimension at play here.

    To be honest capitalism in its pure form doesn’t exist because capitalism in its pure form cannot possibly work, for very logical reasons, though that doesn’t stop capitalism gravitating toward this insanity before conscious effort can save the day. The sort of logical reasons incidentally that tell us a globalized socialist system would perform much much better.

    The issue is of course, how to get from here to there! I don’t have any answers I am afraid, other than socialists at all times being internationalist and never capitulating to nationalism and I admit this is not much of an answer!

  12. jlowrie Says:

    ”miserable….bad….worse” : such adjectives applied to a society are only meaningful by comparison with other societies. If Wal had toothache, it would be legitimate to compare his( bad, miserable, worse) toothache with Henry’s ; but it would make no sense if Henry himself did not have toothache. So by what criteria is the social situation of women deemed to be miserable in North Korea? Are women more miserable there than in Iraq or India etc.? And which sources does Wal employ to establish such criteria?

    ”I know” because the Bible tells me so, or at any rate ”my information”. No, Wal, you believe; and without knowing a great deal about the provenance of your sources of information one must suspend belief in your beliefs. Personally, when faced with bourgeois historians, I recommend to you the cautionary words of the Greek satirist Lucian in the introduction to his “A True History”: ” for though I tell the truth in nothing else I shall at least be truthful in admitting that I am a liar!”

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