How the North Korean Economy Works

The country of North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), has an isolated and tightly controlled command economy. A command economy is a standard component of any communist country. In a command economy, the economy is centrally planned and coordinated by the government.

The government of North Korea determines what goods should be produced, how much should be produced, and the price at which the goods are offered for sale. 

A Brief History of Korea

Korea was historically an independent kingdom. However, following the Russo-Japanese War, the Korean peninsula was formally annexed by the Japanese. Korea remained a Japanese colony from 1910 to 1945.

After World War II, the Japanese forces in the northern region of Korea surrendered to the Soviet Union. As Japanese forces withdrew (and the Japanese occupation effectively ended), Soviet troops took control of the northern region of the country. At the same time, American troops took charge of the southern region. While both leaders claimed to support reunification efforts through a system of democratic elections, the ideologies of the U.S. and the Soviet Union remained diametrically opposed. The planned election, overseen by the United Nations (U.N.) and originally set for 1947, never occurred.

The newly separated regions appointed their respective leaders. And after the U.S. and the Soviet Union withdrew their troops on the ground (although they still maintained a significant diplomatic presence), small-scale conflict between the two regions abounded. However, it was not until 1950, when Kim II-Sung (backed by the leadership of the Soviet Union), made an attempt to capture the U.S.-backed southern region of Korea (the Republic of Korea, or ROK), that formal attacks began to occur. These attacks sparked the Korean War, which lasted from 1950 to 1953.

The Evolution of North Korea

Kim II-Sung’s attempt to capture the southern region of Korea and bring the entire peninsula under his communist rule was ultimately unsuccessful. At first, North Korean troops engulfed the entire peninsula. But approximately four months into the conflict between the two regions, around 15 different countries (including the U.S.) entered the conflict by backing the South Korean forces. In 1953, the formal conflict between the two countries ended with an armistice. An armistice is an agreement made by opposing sides in a war to stop fighting for a certain time.

Part of this agreement was the creation of the demilitarized zone (DMZ), a heavily-guarded, four-kilometer wide strip running along the 38th parallel of the country. This zone splits the Korean peninsula roughly in half. To the north of the DMZ, North Korea (DPRK) established its national economy through heavy industry-first development and military-economy parallel development. To the south of the DMZ, South Korea (ROK) established one of the world’s most advanced modern-day economies.

Many experts believe that these policies of the North Korean government, beginning in the aftermath of the Korean War, have been an obstacle to the country’s economic development.

The shortcomings of these policies were accentuated by the regime’s focus on songun (a style of military-first politics), which has worsened North Korea’s chronic economic problems. In the decades following the Korean War, there has been consistent stagnation in the region’s industrial and power output.

North Korea’s Economic Development

The first phase of North Korea’s economic development, following the division of the formerly unified kingdom, was dominated by industrialization. This was a difficult task, considering the damage the infrastructure of the country weathered during the Korean War.

North Korea assumed the Soviet model of governance and economics, as well as the ideology of juche (self-reliance). This model emphasized the development of heavy industry and investments in the iron, steel, cement, and machine tool sectors. Throughout the 1960s, there was a steady increase in industrial output.

Then, in the early 1970s, the country incurred foreign loans and invested in large-scale imports of machinery and plant facilities from other countries, such as Japan, Germany, France, and Britain. This was 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 struggled to manage its debt; the country was also impacted by the oil shock that rapidly increased petroleum prices. The prices of North Korea’s main exports nose-dived; at the same time, it had to pay more for its imports. A trade deficit surfaced, further weakening the country’s repayment capabilities (and further aggravating the issue of its external debt). The economy began to slow down.

In the 1980s, North Korea experienced supply shortages, mechanical obsolescence, and infrastructural decay. The country responded to these problems through the highly centralized functions of its economy without opening up or liberalizing its economic management.

The North Korean economy entered one of its worst phases of stagnation–and almost collapsed–in the 1990s. The disintegration of the Soviet Union, followed by a food crisis in the aftermath of a series of natural disasters–hail storms in 1994, flooding from 1995 to 1996, and droughts in 1997–pushed North Korea into an economic crisis. Between 1990 and 1998, the country experienced an average annual growth rate of -4.1%. The country became the recipient of international aid beginning in the mid-1990s; the aid continues even today.

In the 2000s, North Korea expanded its tactics for recovering its economy. In 2002, it eased some restrictions in order to allow semi-private markets and launched a series of economic reforms that it referred to as Economic Management Improvement Measures. Some of these measures included an increase in both prices and wages, a shift in the price-fixing mechanism, changes in the distribution system, decentralization of national planning, an increase in the autonomy of enterprise management, the opening of the distribution market for production methods, differentiated distribution, and social security system reform. Economic growth picked up for a few years, and this period was considered an improvement over the previous decade. From 2000 to 2005, North Korea grew at an average rate of 2.2%.

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.

The country still makes significant investments into its military, and some analysts claim that this expense may come at the cost of its economic development. In 2016, the last year for which estimates were available, North Korea spent an estimated $4 billion, or approximately 23% of it gross domestic product (GDP), on defense spending.

Today, China is North Korea’s main trading partner. North Korea relies on China for both economic and diplomatic assistance. In 2017, close to 86% of the region’s exports from North Korea were directed to China. The country’s 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 came from China in 2017.

Limitations of Economic Data

North Korea is known to be secretive, and it does not release economic data. The region has not published any official indicators or statistics on its macroeconomic conditions since 1965. 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 trade information specifically.

The Bottom Line

The economic history of North Korea includes significant periods of stagnation and crisis, with intermittent phases of recovery and some economic growth. The regime’s priority to make Korea a defense economy has overshadowed development, food production, living standards, and human rights. A major issue currently facing the country is human trafficking; many men, women, and children are subjected to forced labor and sex trafficking. And North Korea is a primary source of labor for foreign governments, most often Russia and China. North Koreans do not have a choice in the work the government assigns them, cannot change jobs, and face punishment from the government if they try to escape their forced labor.