[Feature] A Historical Primer to the North Korean Economy

Friday 8th February, 2013

The partition of the Korean peninsula is not only a geographical divide, but also an economic divide. South Korea is one of 12 developed countries in the world, while the North Korean economy is one of the poorest. But it was not always like this.

In the 1970s, North Korea’s GDP was considerably higher than that of South Korea. This is because during Japan’s colonial rule, its industrial facilities were mostly located in the northern half of the Korean peninsula. As well as gold, coal, minerals and other natural resources being in abundance in North Korea, the Cold War also proved to North Korea’s advantage. Unlike the monopoly of the US dollar and its capital market, barter and trade remained free in the socialist Eastern Bloc under Soviet suzerainty.

On the other hand, South Korea was predominantly plains and was backwards in terms of agriculture, as well as lacking in mineral reserves. Furthermore, while North Korea shared a border with China and the former Soviet Union, South Korea was surrounded to the east, west, and the south by the sea and was effectively an island nation. Into the early part of the 1970s, the North Korean economy was ahead of South Korea’s and it maintained an intention to strategically absorb the South into a federation.

However, as Park Chung-hee seized power in the South, the tables began to turn. Through a dictatorship according to the Revitalizaing Reforms (Yushin) system, Park focused on national development; while Kim Il-sung continued to use his dictatorship for personal entrenchment. Yet it was at the start of Kim Jong-il’s hereditary politics that the North Korean economy really began to plummet. Kim Jong-il focused not on economic development, but on building monuments, creating records of revolutionary deeds, and constructing historical landmarks, in order to legitimate his hereditary succession.

Above all else, the major trigger for the collapse of the state’s planned economy was the First Planned Economy established in the 70s. The First Planned Economy was a self-contained planned economy that funded the personality cult, and which allowed the Leader to draw funds from it at his own discretion. For instance, if Kim Il-sung spontaneously requested for a number of cars at a construction site, the direction of the North Korean economy would have to shift suddenly to accommodate this new demand. In order to prevent this scenario from putting the economy into disarray, factories all over the country was built to operate according to two systems: the people’s planned economy and the First (Leader’s) Planned Economy.

The problem with this was that the Leader came first in North Korea. Consequently, the small-scale First Planned Economy was given precedence over the much larger people’s planned economy that supplied the rest of the country. Eventually, there came to be one country with two economies; that is to say, the Leader’s economy and the people’s economy were separately managed. In this process, the overall balance of the North Korean economy was fundamentally disrupted.

Moreover, at the end of the 70s, the Party’s economic system came to rear its head over the people’s economy, because the Party had absolute authority. If the people’s economy is an economic system contained within domestic limits, the Party’s economy is an economic system that interacts directly with the outside world.

For example, within the Party’s economy, there is Office 39 and Office 38. Office 39 is the department that is responsible for trade with countries that have diplomatic relations with North Korea, while Office 38 engages in non-diplomatically sanctioned trade for the purpose of earning hard currency. The reason that inter-Korean economic cooperation is overseen by Office 38 is because there are no diplomatic relations between North and South Korea. When the socialist markets were thriving, Office 39 looked after Kim Il-sung’s slush funds while Office 38 looked after Kim Jong-il’s.

In this way, as the First Planned Economy was prioritized along with the Party’s economy and the Second Planned Economy (the military-industrial complex), the people’s economy was relegated to become the lowest economic priority.

(to be continued)

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