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-20^th 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.