How the North Korea Economy Works

North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), is an unreformed, isolated, tightly controlled, dictatorial command economy. The Korean peninsula was a Japanese colony from 1910 to 1945. As World War II drew to a close, the Japanese forces in the northern region of Korea surrendered to the Soviet troops while the American troops took charge of the southern region. The supposed reunification through elections never took place in the Korean peninsula, and the two regions appointed their respective leaders. In 1950 Kim II-Sung, backed by the Soviets, made an attempt to capture the U.S.-backed southern region (Republic of Korea), which sparked the devastating Korean War (1950 to 1953).

Kim II-Sung's aspiration of bringing the entire peninsula under his communist rule failed. Soon after, North Korea (DPRK) established its national economy through heavy industry-first development and military-economy parallel development. Many experts believe that these policies have been an obstacle to the country’s economic development.

The shortcomings of the policies were accentuated by the regime’s focus on songun (military-first politics), which has worsened North Korea's chronic economic problems. There is stagnation in industrial and power output, along with food shortages, because of systemic problems. According to the Central Intelligence Agency (CIA) World Factbook, “Industrial capital stock is nearly beyond repair as a result of years of underinvestment, shortages of spare parts and poor maintenance. Large-scale military spending draws off resources needed for investment and civilian consumption.”

North Korea’s initial phase of economic development was dominated by industrialization, which was impressive considering the devastation caused by the Korean War. The country then assumed the Soviet model and the ideology of juche (self-reliance), which emphasized the development of heavy industry. With investments in the iron, steel, cement and machine tool sectors, there was a steady increase in industrial output in the 1960s. However, trouble was brewing by the 1970s.

The country incurred foreign loans and indulged in large-scale imports of machinery and plant facilities from advanced countries such as Japan, Germany, France and Britain in the early 1970s. The decade witnessed a shift in North Korea’s borrowing; almost all loans in the 1960s were accepted from socialist states while loans in the 1970s included a huge amount from capitalist states. 

Foreign Loans and Grants (US$ Million)

Source: "North Korea’s External Debts: Trend and Characteristics, Korea Focus" (KDI Review of the North Korea Economy, March 2012, published by the Korea Development Institute)

North Korea was barely able to manage its debt and was hit by the oil shock that rapidly increased petroleum prices. The prices of North Korea’s main exports nose-dived while it had to pay more for its imports. A trade deficit surfaced, which weakened its repayment capabilities and further aggravated the issue of external debt. The economy began to slow down.

North Korea’s economy in the 1980s showed symptoms of malfunction in its centralized planning system. There were supply shortages, systemic inefficiencies, mechanical obsolescence and infrastructural decay. North Korea tried to resolve its problems through its highly centralized functions and by refusing to open up the economy or liberalize its economic management. The rigidity in the approach caused the region to drift toward stagnation. 

The North Korean economy entered one of its worst phases and almost collapsed in the 1990s. The disintegration of the Soviet Union followed by a food crisis caused by a series of natural disasters (hail storms in 1994, flooding in 1995 to 1996 and droughts in 1997) pushed North Korea into a crisis. The region experienced one of its hardest times. The country became heavily dependent on international aid to avoid widespread starvation in the mid-1990s, and the crisis was so severe that the aid continues even today.

According to the CIA’s World Factbook:

“The North Korean government often highlights its goal of becoming a 'strong and prosperous' nation and attracting foreign investment, a key factor for improving the overall standard of living. In this regard, in 2013, the regime rolled out 14 new Special Economic Zones set up for foreign investors, though the initiative remains in its infancy.”

In the 2000s, DPRK finally attempted to recover its ailing economy. It eased restrictions to allow semi-private markets by introducing the Economic Management Improvement Measures in 2002. Economic growth picked up for a few years before dipping again, but the period was an improvement over the previous decade.

The military ambition of the country still takes priority at the cost of its economic development. According to a report by the Ministry of Unification, many experts have concluded that North Korea actually spends 30% to 50% of its total state funds on its defense industry.

North Korea is known to be secretive, and it does not release accurate economic data. The region has not published any official indicators or statistics on its macroeconomic conditions since 1965. The regime has brought some facts and figures to international platforms that have shown inconsistencies and, thus, are not considered reliable. The few sources for basic statistics on the North Korean economy include The Bank of Korea (South Korea) and the Ministry of Unification and Korea Trade-Investment Promotion Agency (KOTRA) for North Korea’s trade.

The economy of North Korea has been badly impacted since the fall of the Soviet bloc in 1991. The impact is explicit in its average annual growth rate of -4.1% from 1990 to 1998. This resulted in a drop of more than 50% in total production from 1980s levels. There was a change of pace in 1999 when the economy showed signs of recovery. From 2000 to 2005, North Korea grew at an average rate of 2.2%. There was a downturn yet again in 2006, and during the five-year period 2006 to 2010, only the year 2008 registered positive growth. The DPRK has inched up since 2011.

The gross domestic product (GDP) of North Korea is estimated to be $40 billion in 2015, according to the CIA's World Factbook, which has not given any updated GDP information since that date. In terms of GDP per capita, North Korea had a per capita GDP of $1,700. Agriculture accounts for 25.4% of GDP, industry accounts for 41% and services account for 33.5%, according to a 2017 estimate.

In terms of trade, China is North Korea’s main trading partners, according to the CIA's World Factbook. Close to 86% of the region's exports from North Korea are directed to China. The main exports are metallurgical products, minerals, manufactured products, textiles, and agricultural and fishery products. The main import items for North Korea are petroleum, cooking coal, machinery, equipment, textiles and grain. More than 90% of the region's total imports come from China. Today, China not only accounts for the bulk of North Korea’s trade but also provides the region with concessional assistance and support. 

The economic history of North Korea portrays slowdown, stagnation and crisis, with intermittent phases of recovery and sluggish economic growth. The regime’s priority to make Korea a defense economy has overshadowed development, food production, living standards and human rights. North Korea lives in isolation and hardship with its economy presenting a dichotomized picture with nuclear armament on one side and starvation (but for the aid) on the other.