North Korea s Economic Futures Internal and External Dimensions1 November 2005 Wonhyuk Lim 1 Introduction Collapse of Collapse Scenarios Since the death of North Korea s paramount leader Kim Il Sung in 1994 many outside observers have speculated about North Korea s impending collapse Some even attempted to estimate its probability 2 In 1999 Nicholas Eberstadt felt so confident about North Korea s bleak prospects that he even wrote a book entitled The End of North Korea Much like Mark Twain s premature obituary however the rumors of North Korea s demise have proven greatly exaggerated Over the past decade Pyongyang has demonstrated its ability to respond to crisis and ensure the survival of the regime Moreover in recent years Pyongyang has attempted to go beyond stop gap measures and explore more fundamental changes in economic policy producing remarkable images that defy conventional wisdom Stitch by stitch to a different world proclaimed an Economist article in July 2002 showing a photo of a garment factory in North Korea Shop till you drop was the title of a May 2004 Far Eastern Economic Review article on economic changes in Pyongyang with a smiling image of Kim Jong Il on the cover with the caption Capitalist Kim Although some North Korea watchers continue to express ample skepticism about the economic reforms undertaken by Pyongyang the changes have the potential of transforming North Korea especially if a peaceful resolution of the nuclear crisis enables North Korea to attract a significant amount of outside capital in the form of economic assistance and investment In light of these developments it would be 1 An earlier version of this paper was presented at the Conference on Korea The East Asian Pivot organized by the Naval War College August 26 27 2004 New Port Rhode Island USA The author would like to thank Jonathan Pollack for his helpful comments 2 See for example Marcus Noland North Korea after Kim Jong Il Washington DC Institute for International Economics 2003 1 useful to examine a wider range of alternative futures for North Korea instead of focusing exclusively on the possibility of a regime collapse This paper assesses the economic reforms undertaken by North Korea and examines North Korea s alternative futures using a policy decision forecasting model and a scenario planning framework as analytic tools I posit two key drivers for North Korea s future 1 the extent of economic reform it chooses to undertake and 2 the degree of external cooperation it is able to attain The policy outcomes obtained on both fronts will result from the interaction among actors within the system with different preferences and variable amounts of power Four prototypical economic futures for North Korea are presented 1 Outward Oriented Developmental Dictatorship 2 Half Full Half Empty 3 Arduous March and 4 Neither a Rogue Nor a Tiger 2 Crisis and Response North Korea s Economic Reform in Context 2 1 Economic Shocks and Initial Responses In the late 1980s and 1990s a series of external and internal shocks rocked the North Korean economy forcing Pyongyang to explore non traditional measures to cope with the crisis and ensure regime survival In the late 1980s the breakdown of the Soviet trading bloc made it extremely difficult for North Korea to import essential food and energy inputs with serious repercussions for the economy as a whole In 1993 94 North Korea s nuclear standoff with the United States greatly raised tension on the Korean peninsula aggravating North Korea s economic difficulties In 1994 the death of Kim Il Sung who had ruled North Korea since 1945 fueled speculation about impending collapse from political as well as economic instability In 1995 96 heavy floods devastated an agricultural sector already weakened by unsustainable farming methods Although North Korea managed to survive these shocks they left an indelible imprint on its economy North Korea s economic reforms in recent years should be understood within this context As Figure 1 shows North Korea s foreign trade suffered a catastrophic decline after the collapse of the socialist bloc The former Soviet Union not only accounted for 60 percent of North Korea s total trade in the late 1980s but was also providing de facto aid 2 of hundreds of million dollars by running a chronic trade surplus with North Korea With the disintegration of the Soviet Union this trade all but vanished As a consequence North Korea s trade volume declined by more than 50 percent from 4 8 billion in 1989 to 2 1 billion in 1995 In addition North Korea no longer could conduct trade on friendly terms with China which now insisted on commercial terms Figure 1 Economic Trends in North Korea 1990 2000 110 00 100 00 90 00 80 00 70 00 60 00 50 00 40 00 30 00 20 00 10 00 0 00 1990 1991 1992 1993 GDP 1994 Trade Volume 1995 1996 Oil Imports 1997 1998 1999 2000 Fertilizer Use Source North Korea s GDP trade volume oil imports and fertilizer use estimates are provided by the Bank of Korea Kotra Korea Energy Economics Institute and FAO respectively Note Level values are converted to index numbers and normalized at 100 in base year 1990 Base year values are as follows GDP 23 1 bil trade volume 4 6 bil oil imports 18 5 mil barrels and fertilizer use 832 000 tons 3 This drove up the prices of energy and food imports delivering a crushing blow to the economy as a whole Crude oil imports plummeted from 18 5 million barrels in 1990 to 8 1 million barrels in 1995 and 2 9 million barrels in 2000 a whopping 84 percent decline Although North Korea tried to maximize the use of domestic energy resources such as coal its primary energy supply declined from 24 0 million tons of oil equivalent in 1990 to 17 3 million in 1995 and 15 7 million in 2000 3 Food imports which used to account for as much as 20 percent of total food consumption in 1990 also plummeted domestic food production suffered a significant decline as well due primarily to the lack of critical inputs such as fertilizers 4 According to estimates by the Food and Agriculture Organization FAO North Korea s fertilizer use declined from 832 000 tons in 1990 to 104 000 tons in 1995 5 Unable to generate a sufficient amount of hard currency to finance the imports of raw materials and critical inputs the North Korean command economy broke down Local plant managers and workers could no longer rely on central authorities and had to fend for themselves The public distribution system the very symbol of the socialist
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