Analysis of North Korea's foreign trade: 1970-2001

Multinational Business Review, Spring 2003 by Choe, Sang T, Kim, Suk-Hi, Cho, Hyun Jeong

ABSTRACT: In the first years following the Korean War (1950-1953), the centrally-directed economy of North Korea had been larger in per capita income and had grown more rapidly than the more loosely-controlled economy of South Korea. However, in the absence of rational and strategic economic planning, these advantages soon reached their limits. By the mid-1970s, South Korea's two successful five-year economic plans put it ahead of North Korea. Loss of allies in the early 1990s, consecutive floods in 1995 and 1996, and a severe drought in 1997 caused the North Korean economy to shrink in the 1990s. Thus, while North Korea had gradually reformed its troubled economic system since the early 1990s, these measures were different from market-oriented reform. However, in July 2002, North Korea began to introduce the most significant liberalization measures since the start of Communist rule in 1948 (French, 2002). This paper discusses the performance of North Korean foreign trade and offers suggestions for steps toward globalization to be taken by the country.

INTRODUCTION

North Korea is a society governed by an absolute ruling ideology called juche, a concept of autonomy and self-sufficiency that leads to the belief that Korea should be free from any foreign intervention. North Korea's economy prominently applies to this ideology of juche under the following three principles. First, all means of production are owned solely by the state and cooperative organizations. Second, the state formulates unified and detailed plans to guarantee a high rate of production growth and balanced development of the national economy. Third, socialist production relations are based on the foundation of an independent national economy. In accordance with the juche principle, North Korea's foreign trade has amounted to only about 10 percent of its gross national product (GNP) for years, far below that of most other economies. North Korea has been secluded for more than a half century from the Western world, but the country has recently initiated a policy of internal reform and external engagement. In the view of some analysts, the greatest contribution that Japan, South Korea, and the United States could make in order to achieve durable peace and stability on the Korean peninsula would be to normalize economic relations with North Korea and enter into an extensive program of engagement.

Observers of North Korean policy predicted the imminent fall of the country just after the Berlin Wall collapsed in 1989. Even optimistic diplomats predicted only seven years, at the most, until collapse (Clifford, 2002). These predictions were partially true for economic collapse, but not for political demise. No one knows for sure how many North Koreans died from food shortages in the 1990s, because North Korea is a police state that restricts most reporters and relief workers. However, international aid organizations estimate that the number of starving people in North Korea ranged from 300,000 to 2,000,000 in the 1990s. This is as severe as the greatest famine in modern history, which led to the deaths of 1,000,000 people in Ethiopia during 1984 and 1985 (Noland, Robinson and Wang, 2001). Many children went unfed or underfed. Malnutrition has been blamed for the stunted growth of children in North Korea, where seven-year-olds are seven centimeters shorter and weigh 10 kilograms less than the same age group in South Korea (Kwang Lee, 2002).

Predictably, the North Korean economy began to contract as the collapse of the socialist bloc in 1990 deprived North Korea of major markets. Because North Korea issues no consistent macroeconomic statistics, it is impossible to gain an accurate picture of its economy. Nevertheless, the Bank of Korea estimates that North Korea's GNP fell from $23.1 billion in 1990 to $12.6 billion in 1998, or by 55 percent. Its foreign trade declined by 70 percent in the same period as the country's economy contracted and as trade relations with former communist countries dwindled. In 1998, the country's foreign debt, in default since the 1980s, amounted to $12 billion, not a large figure for most countries, but equaling 96 percent of the country's GNP. North Korean factories are estimated to have operated at no more than 25 percent of capacity in the 1990s (Oh and Hassig, 2000). The health care system virtually ceased to operate. A food shortage became the most pressing economic problem.

While enjoying economic benefits from South Korea and other countries, the North Korean economy finally turned around in 1999. The Bank of Korea estimates that the North Korean economy grew by 6.2 percent in 1999, 1.3 percent in 2000, and 3.7 percent in 2001 after experiencing nine successive years of negative growth. In particular, North Korean grain output recorded gains, and its import volume has expanded rapidly during the last few years. In addition, the average operation ratio of several industrial facilities of North Korea increased from 46 percent in February 1997 to 77 percent in 2001 (Kongdan Lee, 2002).