Reform without Transition: The Economic Situation in North Korea since the July 1, 2002, Measures

Abstract

Poor Economic Performance in North KoreaDespite the severe economic hardship, North Korea has devoted its energy to strengthening its capabilities. Adhering to the so-called military first politics, the harsh North Korean regime continues to maintain its stranglehold on the people and attempts to avert political democratization. North Korea propagates a juche ideology as the foundation of its legitimacy and uses this to insulate its people from the outside world.1 The fundamental obsession with a self-reliant economy has brought about overall economic inefficiency, including a low level of technology, serious neglect of production facilities, and a decrease of labor productivity. As the resultant economic dilemma accumulated, the North Korean economy tumbled severely in the 1990s. North Korea is well aware of the serious problem of its backward economy, but denies the fact that its economic slump can be ascribed to the accumulated problems of its inefficient system. Instead, North Korea blames the hostile policy of the United States, or its weak external economic relations caused by the collapse of the socialist bloc.The economy ceased to function during the 1990s, especially after North Korea suffered severe flooding in 1995. After several years of famine, North Korea announced that the country had overcome its economic hardship through an arduous march of sustained effort by Kim Jung-il and the Korean Workers Party. Positive economic growth in the early 2000s seemed to be made possible by foreign subsidies (see Figure 1). In general, however, the North Korean economy is believed to have failed, losing all its potential and ability to overcome the economic deadlock.Furthermore, North Korea has failed to supply daily necessities and subsistencelevel food to meet the demands of its people (see Figure 2). North Korea needs at least 6.5 million tons of grain to distribute to its people, but its grain supply is far below the demand-by more than a million tons. The poor performance of the agricultural sector is due to the shortage of energy and fertilizer. North Korea was too dependent on Soviet oil and fertilizer subsidies prior to the collapse of the Soviet Union.2In an effort to ride out the economic hardship, North Korea introduced bold measures to improve economic management on July 1, 2002, by increasing salaries and prices and providing its state-run enterprises with some incentives. The socalled July 1st measures are viewed as the most aggressive economic policy adopted by North Korea in recent years. The measures were targeted at curing the country's economic inefficiency within the framework of the state-controlled economy. Although North Korea is encouraging production more practically than in the past, and has pushed ahead with reform-oriented changes in the economic sector, it has yet to find better alternatives that will yield substantial economic growth. The measures were designed only to smoothly manage the planned economy, rather than introducing the merits of the market economy. The most notable example is North Korea's industry, which is still the top-priority economic expedient under its stratocracy.3Put simply, the July 1st measures worked against economic reform.4 In reality, the overall level of production in North Korea has remained in the doldrums for a considerable period of time. The shortage of capital goods has almost paralyzed production activities in most industrial sectors.During the initial period of the July 1st measures, North Korea faced severe inflation. The drastic increase in wages pushed up the purchasing power of the North Korean people. As time passed, an excess demand, caused by high wages combined with the ever-increasing speculative demand, touched off skyrocketing price increases. This is a typical monetary illusion, which refers to the tendency of people to think of currency in nominal terms. To stop high inflation, there is a need to add up production factors or improve labor productivity. …