The state of North Korea’s economy, one year after Kim Jong-il’s death



(Photo: David Guttenfelder/AP)

Since the death of Kim Jong-il, the North Korean dictator who died one year ago today, there’s been hope and speculation that new leader Kim Jong-un would open his country to the West through bold economic reform.

In part, those expectations were stoked by photos of Western influences seeping into the regime: Jong-un has done photo ops at water parks and taken roller-coaster rides with foreign diplomats, Disney characters have performed for the new leader on state TV, and Jong-un’s wife has sported a Dior handbag, to name a few examples.

Though very little reliable information comes out of North Korea, the first solid indication of change came in April. Giving his first public speech since taking control of the country, Jong-un vowed that North Koreans would “never have to tighten their belts again.” It was a bold promise given that per capita GDP is below US$2,000 and nearly a third of children under five are malnourished, according to the United Nations.

But despite the promise of change, most North Korean observers believe that hype around economic reform remains only that. If anything, life in North Korea is as bleak as ever.

“The evidence for economic reform to date is scant and based on purported private statements rather than government pronouncements,” wrote Bruce Klingner, a research fellow at the Heritage Foundation and former CIA official, in an October op-ed for the Los Angeles Times.

He added: “In July, Pyongyang denounced suggestions of reform as ‘hallucinations’ and said that expecting reform in North Korea was ‘nothing but a foolish and silly dream.’”

Strangely, it was during July that rumours of reform started gaining traction. North Korean watchdogs and Western media started reporting that the regime was looking to overhaul its agricultural sector. Though the exact terms varied across reports, essentially the changes were aimed at increasing productivity in farming collectives by allowing them to keep a greater share of their harvest. For a country that teeters on the edge of starvation, the news was encouraging.

Those rumours reached a boiling point in September when North Korea’s parliament held a rare second meeting of the year. But the session came and went without any mention of substantive changes.

“There was a huge hyping up of expectations, which I think was totally misplaced,” says Brad Babson, a former World Bank official and recent contributor to North Korea in Transition, a book published by the Council on Foreign Relations. “I’m not sure why everybody got so excited about it.”

The rumour mill is following a similar script as in 1994, Klingner tells Canadian Business. Then, Jong-il assumed leadership after his father Kim Il-sung passed away. The U.S. State Department believed that Jong-il would be “a bold economic reformer,” says Klingner, but those expectations never came to fruition.

For the time being, the North Korean economy is propped up by the country’s chief ally and business partner, China. The two countries signed an agreement this year to develop two special economic zones. But as Chinese companies have found, doing business in North Korea is not without its headaches.

Earlier this year, a deal to refine iron ore by China’s Haicheng Xiyang Group went south after North Korean officials “shook down” the Chinese investors, according to a Reuters report. The company’s founder took to Weibo, a Chinese micro-blogging site, and vented: “Doing business in North Korea is a nightmare.” In the same Reuters story, a Chinese trader said that North Korean policies “are not stable, so we dare not invest there.”

That’s one reason why North Korea has yet to fully exploit its mining potential.

The North is sitting on US$6 trillion worth of minerals, according to a South Korean state-owned mining company, including rare earth metals, which are used to build everything from smart cars to iPhones. Currently, China accounts for more than 90% of the world’s rare earth production, and a number of Chinese miners have operations in North Korea.

But the North’s mining sector only operates at less than 30% of its capacity, hampered not only by an unfavourable investing climate, but also by outdated equipment and an unreliable power supply.

“The degree of difficulty of getting the rare earths programmed and moving may be more than they can manage at the moment, in a practical way,” says Babson. “But if the demand is there, sooner or later someone will find a way to do it.”

In the meantime, the North Korean government may face an inflation crisis. “Analysts say inflation has been at 200 percent the past few months,” said a September report from National Public Radio. “The currency is collapsing, and the price of rice has skyrocketed.”

Two years ago, North Korea dealt with inflation by undergoing a currency denomination, a process wherein the face value of circulating currency is changed. Citizens were given a week to exchange a limited amount of banknotes at the rate of 100 old won (the North Korean currency) to 1 new won. Most experts felt the government used the revaluation as a means of cracking down on a budding private sector.

Klingner says it’s all part of the regime’s trend of loosening controls, then abruptly exerting its power.

“So even during the Great Famine in the mid-90s, when the formal distribution system could no longer provide all the nutritional requirements, the regime would allow black markets to flourish,” he says. “And then as the economy improved, the regime would crack down on them.”

For now, it seems that North Korea’s new regime behaves much like the old one. Just last week, it ignored international sanctions when it launched a rocket, part of the country’s long-term nuclear strategy and ever-present policy of maintaining a strong military.

But if North Korea is unable to forge stronger relationships with its neighbours or make life more prosperous for average families, then Jong-un’s legacy might be doomed from the start.

Just take a look at how North Korea’s southern neighbours have fared. Forty years ago, North and South Korea had roughly equal per capita GDPs. Since then, South Korea has transitioned from a military dictatorship to parliamentary democracy and its economy has grown substantially. In fact, South Korea was named the “big winner” of 2012 by Canadian Business, due largely to the global success of its homegrown brands, such as Hyundai and Samsung.

North Korea, on the other hand, has basically flat-lined as neighbouring countries have become global superpowers.

“It’s nice to be able to set off missiles,” says Babson, “but if [North Korea’s leadership] can’t respond meaningfully to the economic promises they’re making, I think that’s going to be trouble for them.”

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