DPRK Briefing Book : The Prospect of Economic Reform in North Korea

DPRK Briefing Book : The Prospect of Economic Reform in North Korea

Yukie Yoshikawa, MIA student at School of International and Public Affairs, Columbia University, posted March 15, 2004.

  1. Introduction

    North Korea has undertaken economic reform since July 2002. This paper is aimed at addressing the reasons of the reform, and the prospect for the success, discussing possible ways to support the reform, mainly focusing on the opinions by Japanese experts on North Korea during July 2002 – August 2003.

    Measures taken by the DPRK are described for major changes as below:

    1. Price Increase
      Pyongyang used to buy rice at 0.8 won from farmers, and sell it at 0.08 won to consumers. After the reform, rice is bought at 40 won, and sold at 44 won. All the prices of other goods also soared in line with the rice price. Prices for utility, bus/train services, house rent also rose. [1]

    2. Abolition of rationing except for crops
      Rationing was abolished except for crops, and goods are traded using currency. [2]

    3. Wage Rise
      Although workers used to be paid regardless of their performance, they earn according to how much they worked, and those who don’t work will not be eligible for services provided by the government. Wage was raised approximately 20 times on average. Also, it should be noted that the wage would be paid in currency, along with the abolition of rationing for most of the goods. [3]

    4. Enhancement of self-management of enterprise

      The central government plans only strategically important departments, while letting each enterprise and factory plan by itself. [4] State Owned Enterprises (SOE) are allowed to trade a part of its production and materials between themselves in a new market called “socialist goods trading market.” [5] They can sell or export their products by themselves, and earn the capital necessary for their plan. [6] Here, the prices can be set between the traders, within 10-15% of the prices set by the government. [7] In production, such indicators as cost and profit are also emphasized and SOE are expected to be self-financed, [8] shutting down highly inefficient ones. [9] They are also expected to focus on their specialties of their production. [10] SOE also started to restructure their organization, firing many of managers (Party members) who were enrolled for political reasons. [11]

    5. Devaluation of the North Korea won

      North Korea won was devalued by a factor of 70, which was more realistic than before, from USD1 = 2.15 won to 150 won. [12]

    6. Farm reform

      Farmers own the right to cultivate a piece of land, while the People (the government) keep owning the land itself, sticking to the socialist principle. [13] Farmers can distribute their product according to the amount of their labor, after paying the fee, 15% of their product. [14] Furthermore, in collective farms in the north, farmland is allocated to individual farmers for cultivation. [15] Here again, the prices can be set between the traders, within 10-15% of the prices set by the government. [16]

    7. Partial open-door policy

      Sinuiju area was given 50 years of independent authority, including legislation, administration and judicial power, aimed at establishing a special economic zone like Hong Kong. Pyongyang adopted an unprecedented policy not to interfere except for diplomacy and national defense. [17] It is also given authority to issue visa independently, and ruled by the secretary of the district appointed by Pyongyang. This must have been based on the lesson learnt from the Rajing-Sonbong area to allow more flexibility than controlled by the central government. Sinuiju is more focused on light industry, while Rajing-Sonbong more on heavy industry. [18] It is developing international finance, trade, commerce, science, entertainment /sightseeing districts. [19] Besides, Gaesung industrial district was designated, to construct an industrial center. Laws for the district were prepared, and expected to be an international industrial, trade, financial, sightseeing area. Mt. Kumgang sightseeing district law was also announced, for developing the tourism industry. [20]

    The following discussion would explore the causes of the economic decline in North Korea, and examine if the reforms mentioned above would really be prescriptions for its economy, along with repercussions of the reform, and historical lessons of economic reforms in other communist countries. This paper concludes with a recommendation to North Korea to breakthrough the current situation.

    The recommendation includes a three-stage approach to address the economic issue. First, as it is impossible to work on the restructuring its economy without capital, it is imperative to obtain it. This would require opening its country and abandoning its nuclear program. Second, in order to feed people and prepare for the further economic growth, food production should be increased, and the social and economic infrastructure should be developed. Last, but not the least, reforms should be made to revive its state enterprises, in order to function properly with efficiency.

  2. Causes of the economic decline in North Korea

    The following chart indicates the relationship of the phenomena and causes of the economic deterioration in North Korea.

    1. Lack of goods

      Figure 1-1. Major root causes of economic decline in North Korea
      (Lack of goods)

    2. As can be seen from the chart, many factors are the causes for one another, creating vicious circles, which keep worsening matters as long as no measures are taken to stop them.

      North Korea is no condition to supply sufficient goods to meet domestic demand, primary due to low productivity and the malfunction of the distribution system. Pyongyang cannot import goods, because of lack of hard currency. Here, discussion is focused on the failure of self-sufficiency. (The lack of hard currency is addressed at 2. Lack of capital)

      In terms of low productivity, there is a vicious circle of low performance of factories due to lack of power, which causes low production of materials and parts of other factories, further lowering the productivity of those factories. [21] To make the matter worse, operations are shortened or interrupted due to the lack of maintenance of facilities and machines as they are obsolete and few parts to keep them in good condition, and due to the out-of-dated technology and management system. [22] Workers do not come to work, either, as they are busy searching for food during food crisis. [23] Factories are struggling to obtain materials, fuel, and power to produce goods that can be sold with much higher price in unofficial markets and are not following the national standard, and to make profit, totally neglecting the central plan. [24] This means that the official markets are too inflexible in terms of prices, ignoring the balance between demand and supply, not signaling the producers to produce more.

      The lack of power plays an important role in the decline of North Korean economy. It is caused by the drop of coal production, the major fuel for thermal power generation. Underlying causes are low productivity due to production increase based on short-sight policy [25] , along with obsolete facilities and lack of capital. [26] The alternative fuel, oil, can hardly be obtained for financial reason. In terms of demand side, emphasis was put on higher output, neglecting on investing in renewing machines with more efficient power consumption. Inefficient machines in terms of power consumption were produced in a large amount during the period of economic chaos. Furthermore, policy was adopted to give priority to chemical industry, with high consumption of power. [27]

      North Korea cannot supplement the shortage of materials and parts by importing, due to the lack of hard currency. “Military first policy” [28] and grandiose projects such as constructing monuments and a highway between Pyongyang and Nampo [29] are distracting the limited resources of the economy. Planning economy was never well planned, which partly explains poor implementation. After the WWII, all the economic plans are either extended or given adjustment period before proceeding to the next plan, except for a three-year-plan in 1954-56. The unrealistic plans are often changed in the middle way. Frequent production campaigns for political reasons are followed by a decline in output. [30] Thus, it is no wonder the supplies of materials and parts are not sufficient in a planning economy.

      Poor planning economy and grandiose projects prevail primary due to the political structure that allows political interference in economy despite its poor performance. [31] Under the current political structure, Kim Jong Il controls the entire policy of his nation and tends to give instructions on everything. There is a limit on what one person can consider and make decisions. [32] Persistence on autarky economy disregarding the caliber of the national economy is responsible, too. [33] So does the lack of observing objective economic indicators to evaluate the feasibility of the economic plans and performance of the implementation of the plans, leaving room for political intervention. “Pyongyang has a distinctive approach to economic affairs … its penchant for ‘planning without facts’, … its fetish for what it labels ‘investment’, irrespective of the productive returns on such expenditure.” [34]

      Another reason for the lack of materials is the collapse of the USSR and following transformation of Eastern bloc countries into market economy. North Korea used to import such important products as oil, coke, machines, flour, etc. and export non-iron ore, fruit, textile, etc. to the USSR. Especially, the USSR was an important provider of oil, along with China. However, along with the collapse of USSR, a new agreement of paying by hard currency in trade between the two countries since 1990 was virtually the end of aid from the USSR/ Russia. The effect was quick, in 1991 imports from the USSR fell by 88%, and exports by 82%. [35]

      The second reason for lacking goods is the malfunction of the distribution system. Railroads are in no condition for a proper operation, primary due to lack of power, maintenance in rails and roadbed, outdated operation management technology, and obsolete locomotives. Road transportation is available mainly for short distance transportation, due to the shortage of fuel and old automobiles. [36]

    3. Lack of capital

      Figure 1-2. Major root causes of economic decline in North Korea
      (Lack of capital)

      The North Korean economy was unstable from the beginning of its establishment. Without aid from China and especially the USSR, its economy has been fragile. In order to overcome such situation, in 1970s, Pyongyang imported a large amount of plants from Western countries. The cost was supposed to be financed by the exports of non-iron metals. However, unfortunately, the oil shock surged the price of plants, while the prices of non-iron metals plunged. This resulted in the insolvency, which led to default, unable to get credit from the outer world. Furthermore, the collapse of the Eastern bloc stopped aids, seriously damaging the economy. [37] Thus, it was impossible for Pyongyang to provide enough capital for its economy.

      Now that the conventional source for fund disappeared, some other way has to be explored. Generally speaking, major means are credit, exports, and FDI. The first option is difficult because of the past default. After the demise of the Eastern bloc, the DPRK also lost markets for exports, as the products produced in North Korea are not competitive enough in terms of quality in market economy. [38] Low quality can be attributed to the low technology and obsolete factories. The exports cannot be increased by volume, due to the low performance of production. [39]

      The third option, foreign investment, is not an easy solution, primary due to high country risk and other competitors. In 1991, the DPRK built Free Economic Trade Zone (FETZ) in Rajing-Sonbong. [40] Its poor success is attributed to the following factors; 1) undeveloped infrastructure, 2) restrictions on labor employment and treatment, and risk to be interfered by the Party, 3) transactions such as buying materials and consignment production with outside the zone was not smooth, as the area other than the zone was still socialist planning economy, 4) the treatment toward FDI heavily depends on the relations between North and South Korea, and Pyongyang’s foreign policy, 5) no credit on North Korea by the default, 6) many other areas to invest in besides the DPRK, 7) little economic statistics, fatal for FDI, [41] and 8) lack of disclosure of laws. [42]

    4. Lack of food

      Figure 1-3. Major root causes of economic decline in North Korea
      (Lack of food)

      North Korea cannot satisfy the domestic demand. Domestic supply is approximately 3.5 million ton, while demand is said to be 5 million ton. [43] It is primary caused by failure to supply domestically and incapability to afford to import food. The domestic supply is low due to low productivity and the malfunction of the distribution system. Little reserve of foreign currency makes the DPRK difficult to procure food from outside. 

      As North Korea is not well suited for agriculture for geographical reason, Pyongyang introduced such measures as reclaiming land, terracing field [44] , encouraging to plant corn, and dense planting. [45] However, reclaimed land could not produce crop due to high levels of salt in the soil. As trees were cut in mountains for terracing field, small amount of rain can cause a flood and surface soil were washed away, resulting in degrading soil. [46] Irrigation facilities and dykes are of little use, due to lack of maintenance, as the government cannot provide enough parts and fixing tools or money. [47] Rocks and sand flow into fields by floods, and farmers cannot remove them by machines because of lack of fuel, only to rely solely on manpower. Then, farmers cannot finish removing before seeding period, and cultivation plans need to be revised. [48] The DPRK cannot afford or produce enough fertilizer, agricultural chemicals, and other materials such as vinyl due to lack of power and hard currency. [49] Nor can they use agricultural machines due to lack of power and fuel. [50] Farmers are also losing incentives for production. [51]

      In terms of imports, import of flour was interrupted from the USSR, and lack of hard currency makes Pyongyang hard to buy crop. [52]

  3. Perspective for the success of the economic reform

    The prospect for the reform is harsh, primary due to too many factors still intact or not seriously addressed, repercussion of the reform, and analogy from the past experiences in communist world.

    1. Unresolved root causes

      The following charts indicate the mapping the economic reform with the causes previously mentioned.

      1. Lack of goods

        Figure 2-1. Mapping with economic reform and root causes
        (Lack of goods)

        “Military first” policy has been totally intact, in spite that military spending is a heavy burden for the economy. [53] Lack of power has not been solved, which is one of major causes of low performance of production and the malfunction of the distribution system. Obsolete facilities cannot be renovated or replaced due to the lack of capital. No measures have been taken to counter the issue of low technology. The autarky economy policy prevails except for FETZ. The political structure with Kim Jong Il controlling everything has not been changed. [54]

        Wage raise can be evaluated as a measure to enhance the incentives for the workers, through which the improved performance can be expected. [55] However, it is difficult to grade the performance of managers, which can easily end up with generously paying incentive to everyone, like in China. [56] The payment of wage by currency can be evaluated, as it leads to a money economy, which can speed up the transfer to a market economy. [57] However, Pyongyang has been valuing the self-sacrificing spirit by name of “revolutionary military men spirit,” and this would give negative impact on the material incentive the reform is promoting. [58]

        Many of the enterprises are downsizing, streamlining many managers who were appointed by the Party. They used to manage the laborers as political instructors and lower class Party secretary. This can be viewed as a first step for the efficient management. Furthermore, the role of the cabinet as the economic commander are empowered, paving a path to the revival of economic technocrats. [59] Emphasis is also given to such managing indicators as cost and profit. However, enterprises need to evaluate their assets in order to correctly calculate their performance. It is a great wonder how they do that, as there were no real prices in the first place. If the East European experiences were to be applied, the evaluation of the assets would be highly political, limiting the possibility for efficient operation. [60]

        Although the reform addresses on decentralization, the DPRK is still stressing on “self-management under central control.” It has not given away to factory managers the authority to decide the amount of wage, promotion, and firing. This is different from what Chinese did in its early stage of the reform. [61] It also differs in terms that taxation [62] and “factory manager responsible system” cannot be seen in North Korea, which also played important role in the Chinese enterprise reform toward the market economy. [63] Enterprises are also under control of the government in financial aspect. The authorities manage supply of capital. Every company can have only one bank account in the central bank, which controls not only all the transactions, but also manages fixed assets, checks financial situations and the books, and audit. [64]

        The new “socialist goods trading market” was originally intended to smooth the exchange of goods among enterprises, reflecting the real economy. Further attention should be paid to this market, whether more kinds of goods can be traded, whether payment by cash or credit will emerge. [65]

        Market and price haven’t been playing the roles in capitalist world. Many of important goods seem to be kept at fixed price, according to the statement by the head of the national pricing department that prices have not been changed since July 1st, 2002, due to “socialism, responsible for peoples’ life.” [66] The price adjustment policy is similar to the China in terms that it reflected the production cost, demand and supply, but not in respect that Pyongyang did not introduce the role of market price. It is unknown if the DPRK will follow suit of China, which changed the price system based on the market price. [67]

        In the past, similar measures to give more incentive through enhancing self-management of enterprises have been taken several times, all failed due to serious shortage of materials and power. [68] Like the Chinese case, it can end with little effect without reform on price and distribution system. [69]

      2. Lack of capital

        Figure 2-2. Mapping with economic reform and root causes
        (Lack of capital)

        Issues not addressed at all include the nuclear program, default in the past, no disclosure of legal system, lack of economic statistics, which are still a great concern to attract FDI. [70]

        Generally speaking, the devaluation of currency stimulates exports. However, exporting goods from the DPRK is highly limited, without much effect. Rather, it should be effective in increasing FDI and consignment manufacturing trade by articulating the low labor cost. If applied the official exchange rate, the monthly wage of a laborer is approximately $13.3, the cheapest in East Asia. [71] [72] The quality of workers and technology in light industry are fine. [73] Nevertheless, according to recent news, there already revealed a discrepancy over the labor cost between South and North Korea in Gaesung industrial district. [74]

        Infrastructure is far from sufficient. Although land was developed, it still lacks electric power and telecommunication network. Hyundai is well prepared to bring in power generators into North Korea; however, no other foreign companies would be that enthusiastic, [75] which is negative to FDI.

        There remains concern about how serious Pyongyang is on its partial open door policy to invite foreign capital. Although the law on the FETZ in Sinuiju was established, the tenet of the secretary has not been set. “Maybe this implies that the central government can fire the secretary whenever it is not happy about the district,” according to the source in the ROK. Even if there is a legal system, it is basically operated as Pyongyang wants, leaving doubt on the freedom of the area. [76] Moreover, there still remains mixed perception toward FDI. Kim Jong Woo, the head of the foreign economic cooperation promoting committee, was ousted out of his post, and the word “free” was erased from the “Free Economic Trade Zone” in Rajing-Sonbong. [77] This policy has been the “exception” in Pyongyang. It has been passive in the first place, tacitly approving simply because of the deteriorating economy, high contrast for China, which “pursued to be rich.” [78]

        In China, one of the important factors in its success in attracting FDI was the presence of Chinese living outside their country. In case of the DPRK, the trade between Tokyo and Pyongyang are often called “North Korea-North Korea trade,” as it is predominantly between Koreans in Japan and their home country. However, they can never be compared with that of China, in terms of both scale and networks. [79]

      3. Lack of food

        Figure 2-3. Mapping with economic reform and root causes
        (Lack of food)


        No measures have been taken for low productivity (lack of fertilizer, other materials, too old facilities, lack of oil, and degraded soil), and the malfunction of the distribution system. The only measures taken in this field is material incentive to farmers.

        Rice price bought by the government was largely raised, giving the incentive of farmers to produce more. [80] However, as the salaries of workers skyrocketed as well, the prices in farmers’ markets will rise, too. [81] Unless the absolute shortage of supply is resolved, price and salaries increases only mean changing the unit of currency. [82]

        Farm reform also expects farmers to be more eager to increase their crop, as they can own more of their crops by themselves than before. While, in China, the policy meant the establishment of the ownership, leading to the start of the economic reform there, North Korea is only aimed at enhancing the willingness of farmers to work harder with larger material incentive. [83] If this incentive works, the effects would be limited, under the circumstances of badly shortage of fertilizer and fuel. [84]

      4. Real intention

        Although there is no clear answer to the real intention of the reform, however, here is a possible answer. The very basic stance of Pyongyang is the survival of the current regime. [85] This reform is primary aimed at the reconstruction of socialist economic structure of North Korean style, not exactly reconstructing its economy. As a whole, the central government still controls the entire economy. [86] The concepts of market economy have been introduced in a very limited manner, and rather the authorities are aiming at removal of liberalism. It is unknown how this policy will change in the future, for the time being, they are pursuing to strengthen management as a whole, partly utilizing the concepts of market economy, and to revive planning economy of North Korean style. [87]

        One of the characteristics of this reform is confirmation of the reality, rather than policy based on new concepts. [88] The major purposes are to reduce the dual economy, and to alleviate burden of national finance. To reduce unofficial market, such measures were taken as price increases, wage raise, abolition of rationing except for crops, and devaluation of North Korean won. To reduce financial deficit, consumer price of rice became higher than wholesale price. National provision of materials to enterprise, which meant national subsidy, can no longer be maintained, just let enterprises being responsible for procuring their materials by themselves. [89] However, even the real purpose is dubious to be satisfied, such as price increases in farmers’ market, widening the gap between official and unofficial market.

    2. Repercussion of the reform
      1. Price increases in unofficial market

        The prices of the official market were raised to close the gap with the unofficial market. Along with the price increases in the official market, the crackdown of the unofficial market was reinforced. However, as long as serious lack of goods remains, it is impossible to completely eliminate it. As a matter of fact, the price of rice rose by twice or three times of the official price in the farmers’ market. [90] Similarly, foreign currencies, mostly USD, are unofficially traded approximately at 350 won (official exchange rate is 150 won), which is difficult for the government to bring USD back to the official market. Even if Pyongyang is intended to change the rate from times to times, North Korean won will keep devaluing, as long as serious shortage of goods prevails. [91]

      2. Deteriorated living standard

        Although the living standard seems to remain the same, some source says the wage is not always paid as declared. In some cases, only a part of the scheduled wage was paid, or laborers are only given “IOU”. [92]  On the other hand, the prices of goods increased, depending on the balance of the supply of the goods. Such services as utilities that used to be free or low priced disregarding the cost were charged or raised the price. In other words, while income was virtually reduced, expenditure rose, making living harder. While the average monthly salary is 2,000 won, rice costs nearly half the salary, if one purchases 700g per day. (.7Kg * 30 days * 44 won = 924 won) [93] The same can be said to farmers. They have to newly give in 15% of the product as the land usage fee, which will be a heavy burden to them. [94]

      3. Other concerns

        The shortage of goods worsened, forcing the Party to import living necessities as an emergency worth $0.2 billion, providing them to shops in big cities such as Pyongyang. [95] This shows the pressure for inflation is at a considerable level. Prospect is not bright in terms of how long Pyongyang can bear this pressure. It has to prepare for more capital to pay wage to laborers, and the only possible resource would be printing more banknotes. If it really does that, hyperinflation would occur. [96]

    3. Looking to the precedence
    4. This reform is similar to “reform cycle” observed in USSR and East Europe since 1950s. For example, it is undertaking introduction of quasi-market, enhancement of authority for decision-making by enterprises and local governments, and pursuit of productivity through the concept of profit. It is highly possible that the reform cannot demonstrate good results, shrinking by the adverse effects. [97] [98]

  4. Conclusion – Suggestions
  5. In North East Asia, China, South and North Korea are unstable and fragile, and cannot take drastic actions. Ironically, balance is maintained because of such situation. Still, we do not know how long this will last. [99] Even if the reform itself cannot expect much effect, it should be evaluated for North Korea to struggling to promote reforms. Only through trial and errors, things can be changed and people can learn from it. [100]

    The followings are some suggestions to North Korea. As previously discussed, there are many factors of causes for economic decline that need to be tackled even more. Among them, the first priority is on attracting capital, developing infrastructure, and increasing food production. However, all the three cannot be achieved all at once. Here is a suggestion for a three-phase approach. An economic aid is gained after the improvement of the relations with the US, Japan, South Korea, and other countries. Then, with the fund, emphasis should be put on agriculture and infrastructure. In the last phase, reform is made on state enterprises to raise their productivity.

    1. Earn hard currency
    2. First, the possible ways for North Korea to collect a large sum of money are economic aid from foreign countries and international financial institutions, foreign trade and FDI through special economic zone, and sales of arms and its technology. The last option is not desirable regarding that it would seriously damage the feasibility of foreign trade and FDI, which brings wealth into North Korea the most of the three options. It is not a sustainable one either, as it is getting harder to do so due to the growing international consensus to impede the transactions. Then, the first two options remain, and the second choice, foreign trade and FDI brings in more fund than economic aid in the long run, however, it is hard to attract foreign capital in the current situation, and this method takes time to really be prepared for it. Thus, the DPRK has to consider two steps, first to obtain an economic aid in short period, and later focus on earning foreign currency through open door policy.

      In order to gain an economic aid, the primary prerequisites is to improve relations with the US, Japan, South Korea, etc. If such issues as nuclear program and missile are resolved and the US drops economic sanction toward the DPRK, it should greatly improve international perception toward North Korean economy. [101] The better relations with such nations will also enable the DPRK to join international financial institutions, such as ADB, IMF, World Bank. [102] Also, negotiations to write off past debt that caused default can be easier in better relations with international community. If the default issue can be resolved, the business world might change its attitude toward North Korea. [103]

      In order to earn generous aid, Pyongyang needs to abandon its “military first” policy so that the outside world would be less suspicious about the money might be distracted to military. It also helps to make sure all the necessary resources are devoted to economic reconstruction, along with stopping grandiose projects such as constructing monuments.

      Although the foreign trade and FDI are focused at 3. Promote open door policy, Pyongyang can start preparing for inviting foreign capital. The disclosure of economic statistics and laws can alleviate high country risk, which is feasible without much trouble and has little impact on the current regime. [104] Studies should be made on smoothing the influx of foreign capital. For example, it is critical to tackle with developing competitive factors such as favorable taxation system to FDI, better than those of its neighbors like China, and with legal systems to smooth transactions between inside and outside the special economic zones. Trials and errors can be repeated, based on the study results, however the failure in this learning process should not be punished. Universities and other education institutes, especially on technical studies, can be moved to the vicinity or inside the current special economic zones. This enables to directly absorb foreign technology and knowledge in terms of both human exchanges and easy access to the more advanced foreign facilities. For example, workers can go to night schools and foreign managers can be instructors at education institutes. As education will be a critical factor in later phases, measures can be taken such as lessening or exempting certain tax if foreign companies provide technical transfer in universities or other educational institutes.

    3. Develop agriculture and infrastructure
    4. With the economic aid, the DPRK can focus on investing in agriculture and infrastructure. North Korea should make sure to produce enough food for its people. Unless the very basic part of life is secure, it is difficult to promote other reforms. [105]

      In order to increase food production, the DPRK can look into Chinese reform. Rather than following open door policy adopted by China since 1978, it may be better to refer to “adjustment policy” China took after the Great Leap Forward failed in 1960. During the Great Leap Forward, China hastened socialization and established collective farmers organizations. This undermined farmers’ morale, and agricultural production plunged so seriously that people starved to death. Furthermore, internationally it was in the Cold War period, and Sino-Soviet confrontation appeared. China was in an isolated situation then. In order to overcome this situation, China worked on “adjustment policy,” which aimed at restructuring agriculture as its first priority. Beijing extended farming land, encouraged the production of industries that support agriculture, such as fertilizer and machines for agriculture. [106]

      The DPRK can start by importing fertilizer, machines for agriculture and oil to operate them, to transport fertilizer, machines, and crop, and to generate electricity. Pyongyang can favor foreign investment that would produce fertilizer and agricultural machines and their parts during this phase, so that the sufficient and stable supply of those products can be achieved in a short period. Technicians must be fostered to maintain the imported machines by themselves. The government also should repair major dykes, dams, and other irrigation facilities to prevent a small amount of rain from being floods and damaging soil. By being able to produce sufficient crop to feed the people without importing, Pyongyang can save US $180 million, or approximately 13% of the total imports. [107]

      Regarding infrastructure, resources should be first focused on logistics and electricity, especially in special economic zones. Railways should be repaired or developed between special economic zone and big cities, and among big cities, while roads between big cities and smaller cities, in a kind of hub and spoke style. Oil must be imported for ground transportation. However, North Korea can start a feasibility study on selling or leasing to foreign capital the rights to dig coal and to sell coal domestically, in order to boost coal production to supply fuel of railways. As such transportation methods require electricity, power stations should be built near big cities and in special economic zones. (Maybe for shorter term, small-scale power generators need to be imported.)

      It is important to include special economic zones in the transportation network, as the zones have ports (and possibly airports) to unload imported goods and they can smoothly distributed to the whole nation. Also, the products produced there can be easily transported to the major markets (big cities), which will be one of incentives for foreign corporations to invest in North Korea. 

      Actually, special economic zones should have the first priority to develop infrastructure such as power, transportation (including port, airport, and road), utilities, and telecommunications. After all, they are important industrial districts, and poor infrastructure has been one of key obstacles to attract foreign investment. In order to smooth and accelerate the construction, foreign technology should be introduced. Universities and other education institutions in the vicinity of special economic zones would play an important role in speeding up the process.

    5. Reform in state enterprises
    6. Any system cannot really change unless the people do not change, however much money can be spent on infrastructure or factories. As long as peoples’ mind is socialist, it is difficult to be able to reform the whole state. [108] The outer world may be able to feed the DPRK for a while, however not forever. Foreign countries may be rich enough to buy fuel or machines for Pyongyang, nevertheless, they are just tools for the people in North Korea to reconstruct their economy. Only the people in North Korea are responsible for improving their own economy. Each one of them is required to proactively think by him/herself to better the productivity and put any possible ideas into practice. However, it is difficult to expect such change to occur without learning about foreign countries. People need to get access to the outer world in any ways, which is full of various ideas, and where people are rewarded for improving and innovating the society. The best way to get used to such situation is to experience it.

      By the time when the food production increases enough to significantly reduce starvation for most of the people, preparatory studies should be in process to address on the reform in the state enterprises and develop master schedule for the process. It should aim at both changing the paradigm of the people and boosting their productivity. Feasibility should be discussed on gradually selling some of state enterprises to foreign companies. They will renew obsolete facilities into more advanced machines, maintain them well, hire and educate workers, procure parts and materials for operation, manage based on the cost-profit concept, encourage the proactive thoughts of each worker, and eventually boost the productivity. These are all the DPRK is incapable of doing by itself, and solve many of the major causes for the shortage of goods, which are previously mentioned. In return, foreign companies should be able to get access to the domestic market to make profit. Needless to say, there are many issues to be addressed, including social security of workers, and treatment toward laborers. If Pyongyang still persists in planning economy, there can be a concession that while a part of the production that meets certain criteria or quality must be sold to the state, foreign capital can sell the rest to the unofficial markets. The DPRK can examine the case studies of East Europe such as Treuhandanstalt, a “transformation agency” that helped some 8,000 East German state enterprises to convert to Western style shareholding companies.

      After such studies, a few enterprises should be sold as pilot attempts. It is impossible to anticipate and be prepared for all the situations beforehand, and through a thorough observation of the pilot companies, valuable lessons can be learned. Based on such lessons, smoother reforms can be realized.

      This experiment could affect the society as a whole, not just affecting the workers in the sold enterprises. The products of much better quality than those of conventional will influx both the official and unofficial markets. Although it may be hard to anticipate the concept of competition works in the official market, at least in the unofficial market, the new goods would be a near monopoly. Then, the old factories that used to sell their products illegally, cannot sell them as well as before. This would trigger possibly two kinds of reaction: the people would make effort to improve their products, and the people would resist any further foreign inflow. In order to appease the resistance, steps should be taken such as establishing a reeducation system and a new welfare system, to integrate those who are highly uncomfortable in the new world.

      Still, the key to the real success is the people in North Korea. It depends on whether the top leaders and the people have deep understanding on the critical situation the whole economy still is and the potentials the success can bring, and support the reform

Bibliography

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Toshimitsu Shigemura, “North Korea doesn’t have enough oil, money, and weapon to fight against the US (Kitachosen niha amerika to senso suru dakeno “sekiyu” mo “kane” mo “buki” mo nai), SAPIO, 2/26/2003

Ji Ho Shing, “Aim at the revival of leading planned economy (Yudogata keikaku keizai heno fukkatsu wo mezasu)”, East Asian Review, Oct. 2002

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Kiyhiko Tanaka, “Economic perspective of the DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment (Shuno kaidan go no chosen hanto: Shinjosei no hokatsuteki kento) , Japan center for international finance, Feb. 2001, http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou012.htm (July 15, 2003)

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[1] Kiyohiko Tanaka, “The current situation and the future of North Korean economy – North Korean economy at the turning point”, JETRO Chinese economy, Dec. 2002, pp30-33

[2] Ibid.

[3] Sun Jik, Hong, “The economic reform measures in North Korea: the evaluation and issues”, North Korea Focus, Aug. 2002, pp2-11

[4] Kiyohiko Tanaka, “The current situation and the future of North Korean economy – North Korean economy at the turning point”, JETRO Chinese economy, Dec. 2002, pp30-33

[5] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[6] World Economy Information Service, ARC report North Korea 2002, World Economy Information Service, Dec. 2002, pp22-28

[7] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[8] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[9] World Economy Information Service, ARC report North Korea 2002, World Economy Information Service, Dec. 2002, pp22-28

[10] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[11] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[12] Kiyohiko Tanaka, “The current situation and the future of North Korean economy – North Korean economy at the turning point”, JETRO Chinese economy, Dec. 2002, pp30-33

[13] Ibid.

[14] World Economy Information Service, ARC report North Korea 2002, World Economy Information Service, Dec. 2002, pp22-28

[15] Kiyohiko Tanaka, “The current situation and the future of North Korean economy – North Korean economy at the turning point”, JETRO Chinese economy, Dec. 2002, pp30-33

[16] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[17] Ibid.

[18] Atsushi Ijuin, The truth and false of “reform” by Kim Jong Il, Nihonkeizaisha, Dec. 2002, pp57

[19] Kiyohiko Tanaka, “The current situation and the future of North Korean economy – North Korean economy at the turning point”, JETRO Chinese economy, Dec. 2002, pp30-33

[20] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[21] Takashi Sakai, “The current situation and perspectives of North Korean politics and economy in DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, pp63-69

[22] Kiyhiko Tanaka, “Economic perspective of DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou012.htm (July 15, 2003)

[23] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[24] Hiroshi Furuta, “The truth and false in the North Korean structural reform”, Toa, Feb. 2003, http://www.kazankai.org /(July 15, 2003)

[25] Takashi Sakai, “The current situation and perspectives of North Korean politics and economy in DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, pp63-69

[26] Kiyhiko Tanaka, “Economic perspective of DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou012.htm (July 15, 2003)

[27] Takashi Sakai, “The current situation and perspectives of North Korean politics and economy in DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, pp63-69

[28] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[29] Takashi Sakai, “The current situation and perspectives of North Korean politics and economy in DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, pp63-69

[30] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp10-11

[31] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[32] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp23

[33] Ming Zhe, Zhao, “Where is NK going?”, Ronza, Oct. 2002, pp137

[34] Nicholas Eberstadt, The end of North Korea, AEI Press, 1999, pp141

[35] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp78-79, 104-105

[36] Kiyhiko Tanaka, “Economic perspective of DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou012.htm (July 15, 2003)

[37] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp15, 66

[38] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp78-79

[39] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp49

[40] Sueo Kojima, “Observing Free Economic and Trade Zone in Rajing-Sonbong”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp118

[41] Teruo Komaki, “The trial and error of the reform and open-door policy of North Korea”, Ajiken World Trend, IDEAS, Jan. 1997, pp40-43

[42] Tetsuo Murooka, “Economic reform under military oriented politics” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp66

[43] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[44] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp14

[45] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp75-76

[46] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp14

[47] Takashi Sakai, “The current situation and perspectives of North Korean politics and economy in DPRK”, The Korean peninsula after the summit meeting: Comprehensive consideration to the new environment, Japan center for international finance, Feb. 2001, pp63-69

[48] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp156

[49] Teruo Komaki, “The trial and error of the reform and open-door policy of North Korea”, Ajiken World Trend, IDEAS, Jan. 1997, pp40-43

[50] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[51] Teruo Komaki, “The trial and error of the reform and open-door policy of North Korea”, Ajiken World Trend, IDEAS, Jan. 1997, pp40-43

[52] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp75-76

[53] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[54] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp23

[55] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[56] Hiroko Imamura, “The reality of North Korean economy”, Ronza, Nov 2002, pp42-49

[57] Sun Jik, Hong, “The economic reform measures in North Korea: the evaluation and issues”, North Korea Focus, Aug. 2002, pp2-11

[58] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[59] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[60] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[61] Sun Jik, Hong, “The economic reform measures in North Korea: the evaluation and issues”, North Korea Focus, Aug. 2002, pp2-11

[62] There is discrepancy on the existence of the revival of taxation. Mikio Sakata (“Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10) says the taxation was resumed, creating the department of national taxation.

[63] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[64] Atsushi Ijuin, The truth and false of “reform” by Kim Jong Il, Nihonkeizaisha, Dec. 2002, pp36

[65] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[66] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[67] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[68] There is a conflicting opinion in terms of effect of material incentive. Mikio Sakata says high moral of producers can expect great increase of production, regarding agriculture and light industry. (Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10)

[69] Hiroko Imamura, “The reality of North Korean economy”, Ronza, Nov 2002, pp42-49

[70] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[71] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[72] For example, in Yangon, Myanmar, the wages ranges $23-40, in Dalian, China,$54-195 in 2000,Jetro,Dec2000
http://www.jetro.go.jp/ove/kan/info/images/
journal/81_cost.pdf
(July 21, 2003)

[73] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp75

[74] Jung Aang Il Bo 11/20/2002 (Internet version)

[75] Atsushi Ijuin, The truth and false of “reform” by Kim Jong Il, Nihonkeizaisha, Dec. 2002, pp61

[76] Ibid, pp59

[77] Hiroko Imamura, “The reality of North Korean economy”, Ronza, Nov 2002, pp42-49

[78] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp161

[79] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp74

[80] Chan Woo, Lee, “The current situation and the future of North Korean economy – Comparison with China in 1980s”, JETRO Chinese economy, Dec. 2002, pp36-52

[81] Tetsuo Murooka, “Economic reform under military oriented politics” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp66

[82] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[83] Tetsuo Murooka, “North Korean economy which cannot start a step for market”, Sekai shuho, May 6-13, 2003, pp20-23

[84] Tetsuo Murooka, “Suffering economic structure in North Korea” from Hajime Izumi and others, North Korea: the real image and its history, Sept. 1998, pp76-77

[85] Masahiro Eguchi, “North Korea at brink to maintain its regime”, from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp73

[86] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[87] Atsushi Ijuin, The truth and false of “reform” by Kim Jong Il, Nihonkeizaisha, Dec. 2002, pp28

[88] Tetsuo Murooka, “Economic reform under military oriented politics” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp65

[89] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[90] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[91] Ibid.

[92] Chosun Il Bo?9/9/2002 (Internet version)

[93] Tetsuo Murooka, “Economic reform under military oriented politics” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp66

[94] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[95] Jung Aang Il Bo?11/13/2002 (Internet version)

[96] Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10

[97] Tetsuo Murooka, “Economic reform under military oriented politics” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp65

[98] Still, there is also a positive precedence: reform in Vietnam in early 1980s, “new economy policy.” Under this policy, non-socialist sector played some role, authority to manage economy was transferred to local governments, and market economy was partly introduced, etc. This reform was successful, especially in farm reform, in which amount of crops to be submitted to the government by collective farmer communities was fixed for five years, farming contract was partly introduced, and prices were greatly raised in agricultural products. However, this should be examined carefully. (Mikio Sakata, “Overview and prospect for the “economic reform” in North Korea”, AJEC report, Mar. 2003, pp2-10)

[99] Hiroko Imamura, North Korean economy from the Chinese viewpoints, Asahishinbunsha, Jan. 2000, pp176-177

[100] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[101] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp86-87

[102] Teruo Komaki, “What will happen in North Korean economy?”, Asahi Soken report, Asahi Research Institute, Feb. 2003, pp29-35

[103] Teruo Komaki, “Suffering economic structure in North Korea”, North Korea: the reality and its history, Kobunken, Oct. 1998, pp86-87

[104] Teruo Komaki, “The trial and error of the reform and open-door policy of North Korea (Kitachosen keizai no kaiho/kaikaku heno mosaku)”, Ajiken World Trend, IDEAS, Jan. 1997, pp41

[105] Hiroko Imamura, “The reality of North Korean economy”, Ronza, Nov 2002, pp42-49

[106] Hiroko Imamura, “The reality of North Korean economy”, Ronza, Nov 2002, pp42-49

[107] Calculated from the data of 2000 provided by KOTRA (Kiyohiko Tanaka, “Economic trend toward foreign countries by North Korea” from Japan Center For International Finance, The future perspective for the international relations on the Korean Peninsula, Feb 2003, pp37)

[108] Sun Jik, Hong, “The economic reform measures in North Korea: the evaluation and issues”, North Korea Focus, Aug. 2002, pp2-11

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