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North Korea’s economic eccentricities

“Once there were bodies lying in the streets; now there are traffic jams”
Andrei Lankov

In the decades when Kim Il Sung ruled, North Korea turned into a society with an unprecedented, and never to be repeated, degree of state control of the private and public life of its citizens. The private sector was almost completely eliminated and the role of money was significantly decreased. In 1957 the trade of rice and cereal (the main sources of calories for North Koreans) was banished and these goods were only offered by the state in prescribed daily rations, for a token price. The farmers were prompted to only work in state farms and they were not allowed to cultivate land over 100s.m, even if it belonged to them, and not even all of them. They would not be given fertilizer or other provisions for their own fields so that they wouldn’t have an incentive to work productively for themselves.

The statues of Kim Il Sung and Kim Jong Il (photo)
The statues of Kim Il Sung and Kim Jong Il (photo)

The country entered a period of personality cult for Kim Il Sung, who founded the state with the 1948 Constitution and drove his country to war with South Korea that lasted from 1950 to 1953. Harsh restrictions were imposed on the political and religious freedoms, and North Korea was isolated from the rest of the world.

Nevertheless, in relation to South Korea, until the late ‘60s it was not immediately obvious to an external observer that the north was in a worse state than their dichotomized compatriots. In the south, income inequality was bigger and the persecution of dissidents by the far-right regime was more intense. Chinese immigrants would resort to North Korea where they were placed in a working position and offered a place to stay. There was also a significant development in the sectors of education and health.

But since the early ‘70s the quality of life declined, never to recover. The impressive development of the south coincided with the decline of the north. ‘Till the ‘80s South Korea would become the most developed country of the continental Asia. North Korea had an unusually large degree of military power that absorbed a large part of the economy. In the ‘90s there were 1.1 to 1.2 million soldiers (in a country of roughly 25 million people, about 1 in 20 citizens were in uniform). Men would spend between 7 and 10 years of their lives in the military.

The economy took a great hit when the USSR collapsed, losing the main source of financial support. Many westerners thought that North Korea would collapse as well, like the countries of the European eastern block did, or that it would make reforms in the direction of creating markets, like Vietnam and China. None of the two happened. Russia and China were not anymore willing to offer free financial aid and raw materials to the bankrupt country. Now they demanded currency, which North Korea lacked. With the cold war having ended support from its two allies now seemed politically obsolete and financially impossible. By 2000 the industrial production was reduced by half in relation to 1990. Officially, most factories remained open and the employees kept going to work, without actually working.

Kim Il Sung on the side of the farmers (photo)
Kim Il Sung on the side of the farmers (photo)

Farming had become dependent, during the previous decades, on the Soviet Union’s chemical fertilizers, that were now becoming a rarity. Artificial irrigation (a necessity since the water had to be raised a few hundred meters from its source) proved problematic when the production of electrical power decreased. Finally, the idea of terrace cultivation led farming in demise. The idea was greeted as the ingenious inspiration of Kim Il Sung himself, but proved unsuitable for North Korea, where the increased rainfall of ’95 and ’96 wasted the crops, decaying the ground. The regime blamed the weather, but it should be added that the same rainfall China endured (the actual source of inspiration for the terrace cultivation) where the only consequence of the ‘natural disaster’ was the slight raising of lettuce and onion prices.

Agricultural production reduced by half and the system of rationing collapsed. The famine that followed led almost 1 million North Koreans to their deaths (4% of the country’s population) and 16 million in need of aid. Refugees offer reliable reports of widespread cannibalism, as human flesh would find its way in meat markets of many cities, sold as animal meat. The results of the famine are still visible, as modern North Koreans are 15centimeters shorter than their southern counterparts. Those who survived the famine managed it by rediscovering capitalism, and by the state’s loosening its grip on its subjects.

The famine mostly hurt the younger and the older civilians (photo)
The famine mostly hurt the younger and the older civilians (photo)

During the period 1998-2008 the 80% of the domestic income was created by illegal economic activities. The small, local, black markets that appeared in the cities of North Korea were neither inaugurated nor backed by the authorities, but were tolerated by a regime that could no longer simply label its citizens “the happiest people in the world”.

In the suburbs, the farmers started to farm secluded fields for their personal use, as the state kept reserving the most fertile lands for public allotment. In the cities they discovered private commerce. They started selling household artifacts they no longer needed or exchanged them for food. This activity soon transformed into trade and household production (e.g. embroidery). By now, it has developed into wholesale trade by citizens with relatives in China who offer them the advantage of a source of capital and experience in enterprise, as well as commodities, since complete control of the borders with China has become impossible and a plethora of smugglers have made an appearance.

The decline and under-development is obvious in satellite images of night-time North Korea, where the entire country is in darkness (photo)
The decline and under-development is obvious in satellite images of night-time North Korea, where the entire country is in darkness (photo)

The leaders of North Korea resist economic reform, neither for ideological reasons nor out of ignorance of the reality of the rest of the world. They are neither ideologues nor irrational. On the contrary, the reasons for which they refuse any real change are pragmatic, as the ruling class knows very well that, in the current conditions of their split country, any reform might prove fatal to them; that it would amount to political (or even physical) suicide. Any reform would be impossible without a significant reduction of restraint in communication. But if the North Koreans were to become fully informed of the economic wealth and the prosperity the southerners indulge in, the validity of the regime would take a severe blow and it would perhaps become unsustainable. Without economic reform the economy will collapse but, if reform does happen, the political system will.

In 2009 Kim Jong Il attempted a reformation to take the collapsing country out of its cul-de-sac, to counter inflation and, at the same time, to hurt the “antisocialist” black markets. An often used measure was actualized, the monetary reform. It is a measure that had been used in the past by many communist parties, e.g. by Stalin in 1947 and by North Korea itself in ’59, ’70 and ’92. The story goes like this: The public wakes up to learn that the currency in their possession will be rendered useless in a short period of time and will be replaced by new a one. The citizens can replace their old bills with new ones, but there is a short deadline and, especially for cash, a limit for this transaction. Also, the places where they can do this are limited. Concerning bank accounts, the limitations are less severe; therefore, obviously, those who are most likely to lose money are those who made money illegally (like in a black market) who keep their money in cash.

The reform was accompanied by (as is normal) a depreciation of the currency. Two zeros were to be redacted from the old Won, which would drop the prices on the levels of the early ‘90s. However, in the case of North Korea certain particularities were introduced to the scheme. The time given to exchange the currency was only a week and those who were working in state factories and organizations (essentially all the lawfully working people) would continue to receive the same pay they were getting before the depreciation! Practically, this meant a raise in their salary of 10,000%, and this was almost the entirety of the population. The westerners initially refused to believe the news of this measure, as they knew that this kind of “raise” could not take place with a mere intervention in the nominal value of the currency. In reality, people share given resources for specific exchanges and cannot simply create resources on paper.

General panic ensued in the country and the citizens were buying whatever they could before the deadline expired. Prices started to drastically rise and any effort by the authorities to set upper limits for the prices and to, conclusively, close down the markets failed to stabilize the economy. The commodities were simply retracted by the sellers themselves as it was not in their interest to sell them at the prices set by the state. The efforts of the North Korea leadership to ignore the laws of finance proved to be as futile as an effort to ignore the laws of gravity. When the last shops closed down the effects of this fiasco were experienced even by the elite. It was of no matter whether someone was a general, a police officer or a successful businessman. Everyone had a difficulty in finding food for themselves and their families. When resentment reached dangerous levels and rumors started of a definitive collapse of the economy, the government was forced not only to allow shops to reopen but also to retract any restraint it had enforced on the local markets the previous years. It was again allowed (although it remained officially illegal) to even sell cereal. Thus, the government indirectly admitted that, in its current form, the country’s economy could not survive without functioning markets.

Hotel Ryugyong in Pyongyang is almost completely vacant, permanently (photo)
Hotel Ryugyong in Pyongyang is almost completely vacant, permanently (photo)

Now we have to wait for any developments under Kim Jong Un’s rule, about whom we have very little information (even his exact date of birth is uncertain). Some suspect that he doesn’t have the support of the elite, which cannot do anything, however, to replace him. Others say that the new Kim wants to be a reformer but, until he gets to place his own people in pivotal positions, he doesn’t have a wide range of influence. Either way, these are speculations. The only thing that is obvious is that, if the regime continues on the same path, with dictatorial statutes, an isolating behavior and impotence in the field of economics, the collapse is simply a matter of time.

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