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Dialogue on the North Korea Economy Industries and Enterprises of North Korea: Facts, Concepts, and Trends February 7, 2022

Dialogue on the North Korea Economy

Industries and Enterprises of North Korea: Facts, Concepts, and Trends

February 7, 2022

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In the study of the North Korean economy, industrial and business activities still remain uncharted territory. They are the most basic components of an economy, yet the scarcity of information makes those in North Korea almost impossible to understand from the outside world. Today, the general perception is that North Korea’s industrial and business activities have completely changed from those of past socialist economies. In fact, rather than central plans, capitalist factors such as markets and profit are becoming the daily standards, and North Korea’s industry and business activities are by no means exceptions to these so-called changes and economic reforms. To understand the present status and future direction of the North Korean economy, it is important to grasp how industry is managed and business activities are conducted.

Against this backdrop, we have invited the leading expert in the field, Dr. Seogki Lee, Senior Research Fellow at the Korea Institute for Industrial Economics and Trade (KIET). Dr. Lee has pursued the goal to better understand North Korea through research and observations of its industry and business activities.

♦ Date and Venue: KDI Seminar Room, July 14, 2020

♦ Interviewer: Lee, Suk (Senior Fellow at KDI)

♦ Interviewee: Lee, Seogki (Senior Research Fellow at KIET)

Industries and Enterprises of North Korea: Facts, Concepts, and Trends

In today’s , we would like to discuss North Korea’s industries and enterprises. From the outside world, these areas are the most basic yet most unknown aspects of the North Korean economy. Despite serving as both the basis and core of the economy, the lack of data has made discussing any future cooperation with and incorporation of North Korea into the international community very difficult. To further our understanding, we have invited world-leading expert Dr. Seogki Lee from the Korea Institute for Industrial Economics and Trade (KIET) to share his thoughts. Dr. Lee has dedicated the last 30 years of his career to the study of North Korean industries and enterprises and so, I firmly believe that we will have much to learn from today’s Dialogue. Our discussion will be divided into four major time points with the 1990s as the base year. First, we will examine the basic forms and concepts of a typical industry and enterprise model in a socialist economy prior to the 1990s. Second, we will discuss the substantial changes North Korea’s industries and enterprises have undergone, particularly following the economic crises in the 1990s. Third, we will explore the industrial and entrepreneurial landscape following the economic crises in the 2000s. Finally, we will learn about the current issues faced by the North’s industries and enterprises, and present suggestions on how research can be further encouraged in this field.

The Industrial and Entrepreneurial Landscape Before the 1990s

Lee, Suk Q.
Let’s open our discussion with the state of North Korea’s industries and enterprises before the 1990s. It is widely known that until this period, North Korea maintained the basic components of a socialist economy, albeit with some deviations. This is considered a critical point as it serves as the foundation for understanding the subsequent changes and activities. Could you define the basic concepts of North Korea’s industries and enterprises, and provide an outline of the economic conditions during this time?

Lee, Seogki
North Korea was among the few in Asia to achieve socialist industrialization, and reach a relatively advanced stage. Above all, the initial conditions in North Korea were more favorable for industrialization in comparison to South Korea. During Japanese colonial rule, the South was mainly used for plundering rice and cotton, while the North was readied for Japan’s entry into Eurasia, equipping it with basic industries such as electricity, railway, chemical, and steel, among others. Roughly 70% of South Korea’s electricity was acquired from its Northern counterpart. The division of the Korean Peninsula, however, suspended the supply which, in turn, ramped up the availability of electricity in North Korea. The surplus was channeled to the military (for metal and machinery), agriculture and the light industries. This forged a structure that produced consumer goods and food which would then generate more labor. At the same time, South Korea had only begun to build power stations and establish key industries. As I said, in many aspects, North Korea had a more advantageous start. Through socialist trade, it was able to procure crude oil and rubber–which were not produced internally–on favorable terms. Trade between socialist countries was conducted based on “friendly prices” reached through negotiations, which was a special price that was much lower than the market price. In this manner, North Korea imported crude oil from the former Soviet Union and exported its domestic-made oil to other countries at a higher price. It was also able to sell its domesticmade machinery through socialist trade, which, in truth, was closer to aid than trade as the products were unmarketable due to their absolute lack of global competitiveness.

"The socialist system functioned well at the outset, with production and investment being generated regardless of market demand. Even when efficiency is set aside, North Korea achieved a fairly high level of industrialization by the 1970s."

The socialist system functioned well at the outset, with production and investment being generated regardless of market demand. Even when efficiency is set aside, North Korea achieved a fairly high level of industrialization by the 1970s. Indeed, despite a lagging light industry and service industry similar to most socialist countries, the energy sector (electricity, coal, etc.), and capital goods industry including steel, metal, raw materials, chemicals, and machinery, began gaining momentum. This new drive eventually extended to the light industry and agriculture consequently creating a single cyclical structure that encompassed the entirety of industry.

North Korea’s industrial development is not unique and can be observed in all socialist states, particularly in the former Soviet Union where it was first established. The Soviet Union aimed to create a special type of economic system that would outlast the capitalist system. Hence, it sought to create a closed but self-sufficient system that could support itself when beleaguered by capitalist foes. This was the foundation for the industrial development that was implanted in former socialist countries such as those in Eastern Europe, China, and North Korea.

However, North Korea sought an even higher level of inward-oriented industrialization. Given the unique situations of a divided peninsula, Kim Il-sung explicitly ordered the creation of an industrial structure capable of producing essential goods with only local resources. This applied to all production of goods with the exception of some that required raw materials that could not be sourced domestically. For example, industries used water and coal to generate electricity, and the electricity and iron ore sectors worked together to produce metal materials for the production of machinery. At the same time, the coal and electricity sectors were combined into the coal chemistry sector which produced chemical materials for other industries. And, this self-sustaining form of industrial development was complemented by the essential resources imported via socialist trade.

"The inward-oriented industrialization strategy, called “Building a self-reliant national economy,” was considerably volatile until the 1970s."

To maintain the workings of such a system, the production of basic raw materials such as coal and iron ore must increase much faster than the GDP. After peaking in the early 1970s, North Korea’s labor force began to shrink from the latter half of the decade. Subsequently, entering the early 1980s, the economy was faced with a situation where further growth was difficult, and with the continued stagnation, it began to deteriorate from the 1990s.

Thank you for your explanation. In the past, North Korea pursued a Soviet-style socialist economy, and it seems that the industrial movement was very different from that of a market economy. I am curious as to how the industrial sector under a general socialist economy worked at the time, and whether it was thoroughly planned during the promotion of industry. A closer look at the overall policies shows that North Korea has consistently pursued the parallel development of its military and economy. In order to facilitate our understanding of the early development and general trends of North Korea’s industries, could you explain how that has been realized in the industrial sector? How is the sector composed, and how has it been supported through policy?

The inward-oriented industrialization strategy, called “Building a self-reliant national economy,” was considerably volatile until the 1970s. In the mid- to late 1970s, there was introspection that the existing economic growth strategy would be insufficient, and hence, large-scale loans were taken out from the West to supplement the coal chemical industry with petrochemicals. The original plan was to build a new economy with the funds from the West and boost economic growth to pay off the foreign debt. However, this plan was completely stymied by the oil shock. In the 1980s, the Joint Venture Act was enacted, and economic revival was sought once more using foreign capital. In the earlier days, pro- Pyongyang Korean Japanese entrepreneurs who sympathized with the North invested mostly to show their patriotism and as a result, substantial investments and outcomes were gained. However, this also failed due to the excessive intervention and exploitative burdens imposed on these pro- Pyongyang companies by the regime as they began to reap the profits. Eventually, the companies withdrew from the North, ultimately sabotaging its economic revival strategy. The biggest misconception of the North Korean authorities was the belief that all profits belonged to them rather than sharing with the market players.

North Korea’s industrial policy is very straightforward. That is, based on socialist principles, the capital goods sector must grow first for the consumer goods sector to expand in the long run. The pursuit of the parallel development of the military and economy was laid on top. Following the Soviet method, North Korea made huge investments in heavy industries while minimizing those in agriculture, the light industry, and consumer goods. Fiscal investment was concentrated in the heavy and chemical industry which is connected to the military industry. The standard of living was consistently very low in the late 1970s to the 1980s even as the economy marked record-high growth. This was because investments in the heavy industries did not have a trickle-down effect on the light industries.

By the late 1980s, conditions further deteriorated to the point where existing practices could not continue any further. North Korea had managed its economy in a simple and direct manner. For example, if the military made plans to build more tanks, another steel mill or blast furnace was built within the existing mill in order to procure the scarce metal. This approach worked well in the 1960s-1970s, however, as the efficiency of capital gradually declined, it was no longer possible to carry out business as usual. In another example, construction projects to build large-scale chemical factories were never completed resulting in a loss of billions of dollars. One case in particular was the Sunchon Chemical Vinylon Complex in the 1980s. Once a factory project is launched according to the plan, it must be completed with the intent that factories are put into operation to manufacture goods in order to avoid losses. Yet, in many cases, projects were suspended, and even when they were completed, production did not meet the goals.

"North Korea’s industrial policy is very straightforward. That is, based on socialist principles, the capital goods sector must grow first for the consumer goods sector to expand in the long run."

This vicious cycle continued until the late-1980s when the focus of economic policy shifted. The regime began to strengthen its economic policies by setting far-reaching goals and plans, and promoting their importance. When these virtually impossible goals were not met, Kim Jong-Il began to use the term, “Speed Battle” which refers to the early use of capital (human, materials, etc.) as investment for the future. Naturally, short-term results were achieved, and this became Kim Jong-Il's brightest achievement and also his political foundation. However, the growth was short-lived, and North Korea had to face a much longer adjustment period. By the late 1980s to early 1990s, the damage done to the North Korean economy was almost irrecoverable with the overall economy crippled by the fall of socialist states, floods, and the death of Kim Il-sung, the leader Supreme.

For more, please refer to the attached file.

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HOT ISSUE

"The socialist system functioned well at the outset, with production and investment being generated regardless of market demand. Even when efficiency is set aside, North Korea achieved a fairly high level of industrialization by the 1970s."

"The inward-oriented industrialization strategy, called “Building a self-reliant national economy,” was considerably volatile until the 1970s."

"North Korea’s industrial policy is very straightforward. That is, based on socialist principles, the capital goods sector must grow first for the consumer goods sector to expand in the long run."