The Other North Korean Crisis: An Economy in Tatters

The Other North Korean Crisis: An Economy in Tatters

I had the rare opportunity in 2002 to take a road trip through North Korea. I had been invited into the country by Pyongyang along with several other foreign correspondents, and even though we rode in a modern bus, the journey itself was like going back in time. From the capital, we drove down narrow country roads for nearly six hours, through small farming hamlets of white homes in neat rows. Men in army-green clothing worked the fields by hand; there were few tractors or animals in sight. Trucks with sacks of U.S. food aid passed by.

Our final stop was the town of Sinuiju, across the Yalu River from China. Officials took us on a tour of the local hospital, a disturbing den of dank hallways and archaic equipment, and a department store offering a sparse selection of packaged food and clothing that looked like 1950s leftovers. After dark, students gathered at the foot of Sinuiju’s giant statue of Kim Il Sung, the country’s founding father, to finish their homework. With little electricity in the town, the spotlights pointed at the statue were one of the few sources of light. The North Koreans escorting us were so out of touch with the outside world that they showed us their city to boast of their prosperity, not expose their poverty.

That was seven years ago, but conditions have probably not improved even though Pyongyang continues to funnel scarce resources into weapons programs. Food shortages returned last year, while aid and investment from neighbors such as South Korea and Japan have dwindled. How bad the situation may be is hard to assess since North Korea doesn’t reveal significant economic data. Estimates from South Korea’s central bank, released on Monday, suggest that North Korea’s gross domestic product recovered in 2008 after two years of contraction, with 3.7% growth. The bank attributed the increase to “one-off factors,” such as an improved harvest.

North Korea’s woes are a direct result of the regime’s refusal to change its outdated economic system. Unlike China’s leaders, who linked market-oriented reforms to the Communist Party’s survival, Kim Jong Il and his cohorts see economic openness as a threat to their power and have in recent years intensified state control over the economy.

After severe famines killed perhaps one million people in the mid-1990s, the government tolerated a limited amount of market reform, including the proliferation of farmers’ markets and the tilling of private plots. But in 2005, Pyongyang reversed course and began reestablishing the state’s dominance over food distribution. Officials have even slapped new restrictions on the operation of marketplaces in recent years.

Marcus Noland, an expert on the North Korean economy at the Peterson Institute for International Economics in Washington, believes that efforts to roll back reform have intensified in the past six months, symbolized by the return of mass-mobilization development strategies that echo the regime’s policies of the 1950s. “The whole country and all the people,” Kim Jong Il was quoted saying in a January editorial, “should launch a general offensive dynamically, sounding the advance for opening the gate to a great, prosperous and powerful nation.”

Noland argues that this “almost back-to-the-future reversion of economic policy” stems from the same root cause as Pyongyang’s recent belligerence — North Korean politics. North Korea watchers speculate that Kim Jong Il, who likely suffered a stroke last year, is maneuvering to install his son, Kim Jong Un, as his successor, and that Pyongyang’s May nuclear test, recent war threats and anticipated long-range missile launch are all part of an effort to build support for the Kims, especially among the country’s powerful military brass. Economic policy, Noland says, has become tied up in the succession as well. “Today inside North Korea, all officials have an incentive to demonstrate how committed they are to orthodoxy,” he says. “As a consequence, there is an internal dynamic that encourages retrograde behavior.”

That behavior can be seen in Pyongyang’s treatment in recent weeks of an industrial park outside the border. The park, opened in 2004, was developed mainly by South Korea as part of Seoul’s attempts to engage its northern neighbor through economic cooperation, and today it houses more than 100 South Korean companies that employ about 40,000 North Koreans. The zone has been a major source of trade for North Korea, but that hasn’t stopped Pyongyang from threatening its operations. In May, North Korean officials said that all contracts regarding the South Korean companies in the park were nullified. Pyongyang is demanding higher wages for workers and other payments that could threaten the park’s very existence by making it too costly for South Korean factories to operate there.

Pyongyang has taken an equally self-destructive position on food aid. Thanks to bad floods in 2007, food shortages last year were likely the worst experienced since the 1990s. The World Food Program says it has launched a program to feed 6.2 million people in North Korea, or more than a quarter of the population. Yet in March, North Korea, without explanation, rejected all food aid from the United States, its largest official donor, and kicked five aid groups distributing the food out of the country. The step is potentially disastrous for the North Korean people. The WFP figures that last year’s harvest, though slightly improved on 2007’s, still fell about a third short of the population’s needs.

Other types of aid haven’t been flowing into North Korea as in the past either. During the decade in which South Korea pursued its “sunshine policy” of engagement with the North, Seoul became a major trading partner and source of aid, especially of much-needed fertilizer. But current South Korean President Lee Myung Bak reversed the policy when he took office in 2008, linking economic cooperation with Pyongyang’s dismantlement of its nuclear weapons program. The result is that North Korea is now more dependent than ever on its main patron, China. Nicholas Eberstadt, a North Korea expert at the American Enterprise Institute in Washington, figures that the gap between the amount of goods China ships into North Korea and what it receives in return has quadrupled in four years to more than $1.5 billion in 2008. Eberstadt considers this “de facto aid” since it is unclear what North Korea may be providing China for all of its imports. “China has become the donor of last resort,” Eberstadt says.

That fact makes Beijing’s policy toward North Korea even more central in any effort to convince Pyongyang to give up its nuclear weapons program. But the North’s recent disregard for its own economic condition doesn’t bode well for any attempt to use financial incentives to woo Pyongyang into better behavior. “They may still negotiate for some kind of deal,” Noland says. “But I don’t think we’re going to get denuclearization” in the near term. That means North Korea’s economy, just like its relations with the outside world, is likely to get worse.

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