NORTHEAST ASIA PEACE AND SECURITY NETWORK 
            *** SPECIAL REPORT ***

[The following bimonthly ‘DPRK Report’ is the product of a joint 
project between the Center for Nonproliferation Studies (Monterey 
Institute of International Studies, Monterey, California, USA) 
and the Center for Contemporary International Problems (ICIP, 
Russian Diplomatic Academy, Moscow, Russia).  It is funded by a 
grant from the Rockefeller Foundation and is provided to the 
NAPSNet for distribution with the permission of the parties 
involved. The authors of the report are Russian analysts at (or 
associated with) the ICIP.]

The DPRK Report  (July-August 1996)

1. The North Korean Economy

North Korea has registered several consecutive years of negative 
economic growth.  According to ICIP estimates, the figures are: -
3.7 percent in 1990, -5.2 percent in 1991, -7.6 percent in 1992, 
-8.5 percent in 1993, -2.0 percent in 1994, and -5.0 percent in 
1995.  The economy continues to decline in 1996 and will have 
contracted by another 3 to 4 percent by the end of the year. 

In the industrial sector mining, heavy, and light industry all 
went down in 1995 by 4 to 5 percent. Due to the seriously reduced 
supply of energy, the utilization of North Korea’s industrial 
stock can be estimated in 1995 at its lowest rate in years: less 
than 30 percent.  This year, imports of crude oil and domestic 
production of coal are even lower, so the generation of 
electricity is even more constricted. 
 
For agriculture, 1995 was a disaster year due to the heavy floods 
that hit the country. If in 1991-1994 the shortage of grain was 
in the range of 1.7 to 2 million tons, in 1995 it  was over 3 
million tons. This year’s prospects are also dismal (a shortfall 
of up  to 1.5 million tons).  Other agricultural products, 
including vegetables, not to  mention meat, are in very scarce 
supply. The whole output of agriculture, forestry, and fisheries 
declined in 1995 by no less than 10 percent. In 1996, the results 
are likely to be only slightly better.  
 
Reductions in industrial and agricultural production have 
resulted in reduced revenues and in the halting of plant 
construction and other new investment. Among 50 key enterprises 
chosen for construction, 30 have not yet been started. Most 
remaining projects have been frozen during the year. There is an 
acute shortage of consumer goods, both agricultural and 
industrial, severe bottlenecks in the transportation system, a 
steep decline in foreign trade, as well as numerous other 
problems in the North Korean economy. 
 
As a result, pressures for change have been building up in the 
DPRK for quite awhile. At this juncture the pressure is close to 
reaching a critical mass.  
 
First of all, let us examine the military factor. The military 
balance has clearly been changing in favor of the South. But 
attempts to overcome the widening gap with the  "nuclear card" 
have been checked. Moreover, the burden of the continued arms 
race has become close to intolerable and threatens to ruin the 
economy completely. The obvious conclusion is that from the 
military point of view Pyongyang will have, sooner or later, to 
mend fences not only with the United States, but also with Seoul. 
 
Second, we must point to the progressively worsening situation in 
the supply of food. Food shortages disrupt economic activities, 
provoke widespread discontent, and may eventually lead to 
uprisings by hungry citizens and even mass demonstrations of 
disloyalty to the ruling regime. There is no way to solve the 
food problem within North Korea’s current economic and foreign 
policy strategies. Its shock tactics to increase productivity 
will not bring about  positive results any longer, since popular 
enthusiasm has disappeared forever and the current famine only 
increases the apathy of the working people. 
 
Third, the lack of internal revenues and foreign capital means 
that the government simply cannot renew investments in industry 
and the social sphere. North Korea’s economy has already lost its 
power of revival under the current system. It may be said that a 
functioning national economy has indeed ceased to exist in the 
North. The remaining economic activities managed by Pyongyang are 
virtually confined to those directly associated with the upkeep 
of Kim Jong Il’s regime.  
 
Fourth, there is also the factor of the growing non-military 
disparity between the DPRK and the ROK. The gap continues to 
grow, creating additional danger to Kim Jong Il’s regime. 
 
All of the above-mentioned factors make it imperative for 
Pyongyang to start moving in the direction of change: there must 
be internal economic reforms, giving people incentives to work; 
and there must be external reforms allowing the DPRK to get 
access to the capital, goods, and technology (which can be 
achieved only through accommodation with Seoul). There is little 
doubt that Kim Jong Il has the ability to understand all this. 
Beginning in the 1980s, the younger Kim was behind attempts to 
correct imbalances in the North Korean economy and to attract 
foreign capital into the country (by introducing the Joint 
Venture Law of 1984, setting up a free economic and trade zone in 
Rajin-Sonbong area, etc.). Agreement with the United States on 
the nuclear issue is also an important sign of realism in 
Pyongyang’s thinking. This move is obviously aimed at laying the 
groundwork for economic cooperation with the United States and 
the West as a whole. 
 
However, Kim Jong Il and his regime are not yet ready for  
drastic reforms. Kim personally is now in the process of 
legitimizing his dynastic succession on the basis of his 
allegiance to the cause of his deceased father and the necessity 
of finishing his revolution. To start risky reforms now is 
tantamount for Kim Jong Il to weakening his fragile prestige in 
the top elite further and to undermining his own power base. If 
reforms don’t pay off right away (and they will not) the younger 
Kim’s claims to power and leadership will be ruined.  
 
As for North Korean authorities as a whole, they fear the 
inevitable ideological and political costs of deep changes in the 
economy: first, confusion, then, disorder, and, finally, the 
emergence--with the interference of the South-- of forces eager 
to do away with the outmoded, archaic, and inefficient regime.  
Such fears have been greatly reinforced by reforms in the former 
communist countries, which resulted in the complete destruction 
of their communist regimes. 
 
Unwilling to take greater risks Kim Jong Il and his entourage 
seem to be concentrating now on the following measures to 
revitalize economy:  
 
a. Renewed attempts to attract foreign investment in the Rajin-
Sonbong Free Economic Zone, especially in its infrastructure. 
Additional economic zones can also be expected--in Shinuiju and 
Nampo, specializing in joint-venture production of light industry 
export products. The policy of easing restrictions on investment 
will be continued. Incentives for investment will be defined in  
more concrete terms. Foreign investors will be allowed to derive 
profits in hard currency. Foreign nationals will be  eligible for 
employment together with North Koreans; use of imported raw 
materials will be permitted; and foreign insurance policies will 
be accepted. Laws and regulations will be improved in such a way 
that they will clearly stipulate measures to protect the property 
and ownership of foreign investors, the assets of enterprises 
they have invested in, their own invested capital, and their 
earned income. Other measures will be taken as well to raise the  
effectiveness of the legal system in attracting foreign capital. 
However, it can be predicted that these measures will not be 
sufficient, because, in addition to the legal arrangements, the 
general liberalization and reform in the political and social 
life of North Korea must come to reinforce its professed drive 
for a gradual economic opening. At this juncture, Kim Jong Il is 
not ready for such measures. 
 
b. There is a possibility that the DPRK will be trying to expand 
economic ties with the ROK, especially by dealing directly with 
South Korean big business, over the head of  Seoul. Nevertheless, 
this would bring mutual benefits even if the two countries remain 
hostile to each other. If the profits involved are sufficiently 
attractive from a governmental viewpoint, the economic exchange 
would serve to reduce gradually the level of tension, whatever 
the state of other dimensions of the bilateral relationship. 
 
c. Over the short-to-medium term, the DPRK needs to make only 
small gains to achieve a greater overall benefit. Food aid (i.e., 
subsidized rice sales), foreign currency ( i.e., the renting of 
North Korean labor and ROK purchases of DPRK material and goods 
at price levels advantageous for Pyongyang), a degree of 
infrastructure development and technology acquisition (via joint 
ventures and the FEZs), and support from international financial 
agencies--all are becoming (or are set to become) available to 
the DPRK under conditions with which the DPRK hierarchy can live. 
Pyongyang will continue its drive to get any kind of foreign aid-
-from individual countries and international agencies--using all 
pretexts imaginable and forgetting about its own pride. 
 
d. Problems in the agricultural sector will be dealt with in the 
immediate future through a continued reform of farming skills, 
the maintenance and expanded construction of irrigation systems, 
and greater production of chemical fertilizers and farm 
equipment. Private farming will not be introduced due to 
ideological, political, and even economic fears (such as lack of 
preparation of the villages for this already forgotten method of 
labor). 
 
e. A re-emphasis on light industry will be made in order to 
provide food and clothing to the population and the armed forces 
and to increase export potential. New elements of private 
enterprise will be introduced ("at home" cottage work squads 
organized at the individual household level) and additional 
investments will be made in the construction of small factories. 
 
f. New efforts can be expected to improve the quality of North 
Korean labor in order for workers to be able to handle advanced 
techniques in information gathering and processing. There will be 
further promotion of foreign tourism as a source of hard currency 
and as a method of achieving a solid infrastructure for the rest 
of the economy. 
 
IN sum, however, it seems that the above-mentioned methods will 
be ineffective in arresting current unfavorable economic trends. 
The streamlining and expansion of North Korea’s legislation on 
foreign investment is likely to change the investment environment 
and the future orientation of its policy for attracting foreign 
capital in the following directions.   

First of all, the revised and amplified legal system will reduce 
the disincentives and reservations prospective foreign investors 
have had as regards investment opportunities in North Korea 
because of the ambiguity and lack of specificity in the old 
statutes. Yet, the reform in legislation will not automatically 
remove the political uncertainties and oppressiveness which are 
often more  important factors affecting foreign investors. 
Attempts by North Korea to adopt an "open door" policy and 
economic reforms by declaring a free economic zone will be of 
little use, since these limited policies are only aimed at 
acquiring the economic fruits of liberalization, without engaging 
in the political and social reforms necessary to reinforce it. 
The dire shortage of foreign exchange reserves, moreover, is yet 
another serious disadvantage for North Korea’s foreign economic 
cooperation. 
 
As long as unfavorable conditions remain in the absence of 
comprehensive reforms in all spheres of North Korean society, not 
many foreign investors would be attracted to North Korea merely 
by the improvement of the legal system relating to foreign 
investment.  The almost total lack of market mechanisms in North 
Korea is another factor impeding foreign investment. For the time 
being, North Korea cannot help but rely almost exclusively on 
Korean residents in Japan, who are sympathetic to the North 
Korean cause and rich enough to make some investment.  
 
The development of the light industry sector was emphasized 
during the 1980s without effect. Thus, there are no mechanisms 
within the existing economy that can help Pyongyang to overcome 
its problems now.

In the absence of significant new inputs, the major source of 
growth will remain the growth of the labor force. With the labor 
force expanding at approximately 20 percent a year, GNP growth 
cannot exceed 2.0 percent a year in the late 1990s. In reality, 
given the operation of other adverse factors, such as the 
declining productivity of the existing industrial structure, it 
may be substantially less.  Quite probably, therefore, the 
current decline will continue. 

In the absence of radical reform aimed at increasing efficiency 
in land use and preventing land degradation, unfavorable 
conditions in the agricultural sector will continue to prevail in 
the late 1990s. Hence, the agricultural sector’s share of GNP can 
be expected to decline to around 20 percent by the year 2000. The 
industrial sector will also continue to deteriorate and decline, 
however, without new management methods and a receptivity to 
innovation and technology from overseas.
 
Prospects of foreign trade are even more dismal. Increasing 
exports at the expense of further reduced domestic consumption 
will be impossible, and, as a result, the volume of foreign trade 
will decrease substantially in the late  1990s. Only the arms 
industry will continue to earn more foreign currency. Without 
large-scale financial assistance from abroad, imports will 
decrease further due to the critical shortage of hard currency.
 
2. Russia’s Reaction to the Four-Power Talks Proposal.  

The four-power talks proposal, advanced by the ROK and the United 
States, is viewed in a negative light by Moscow. It is described 
as an attempt to exclude the Kremlin from the solution of the 
Korean problem, which--according to a Russian government expert: 
"...cannot be accepted, since Russia has been closely connected 
with the events in Korea during the whole World War II and post-
war periods, is a neighbor of Korea, and has strong security, 
political, and economic interests there." 
 
In applying pressure on Seoul to reconsider its four-power 
proposal, the Russian side has elaborated a number of arguments. 
It has stressed that there is no other country besides Russia 
with which South Korean national interests coincide to such a 
degree. Russia, as diplomats and politicians insist, is virtually 
the only power honestly desiring the reunification of Korea. The 
Kremlin needs a strong Korea to balance off against Japan and 
China, while Tokyo and Beijing--for various reasons--are not 
anxious to see the Korean nation unified. Americans may also lose 
if the split in Korea is overcome, as their troops most probably 
will be asked to leave the peninsula. Russian analysts stress as 
well that with the stabilization of their economy, South Korea 
will find in Russia "the biggest market for investments, exports 
of consumer goods, and imports of raw materials." 
 
Russian experts insist on the inevitability of applying three 
basic principles in the successful solution of the Korean 
problem. The first one is recognition of the fact that six states 
are equally involved in the settlement on the Korean Peninsula: 
the ROK, the DPRK, China, the United States, Russia, and  Japan. 
Russian analysts argue that the Korean problem has internal and 
external aspects that are interconnected. Consequently, no matter 
how justified the demands of the two Korean states to other 
parties are against interference into the affairs of the 
peninsula, four foreign powers--China, the United States, Russia, 
and Japan--will still be connected with the process. Any attempt 
to push any of the six participants away from the scene or to 
exclude them from the settlement completely will only slow down 
and disrupt the process itself.  
 
The second principle presupposes that each member of the "six" 
approves normalization of relations among all other  five states. 
Seoul does not like the fact that Washington and Pyongyang are 
building up a bilateral dialogue, while North Korea attempts to 
ignore South Korea. Russians consider Seoul’s reaction 
unjustified and near-sighted.  Analysts note that the "cross-
recognition" concept on the Korean Peninsula was developed by 
United States and was supported by the ROK and Japan. However, 
after first the Soviet Union and then China established 
diplomatic relations with the South, Washington and Tokyo did not 
make similar steps towards the North. Moreover, numerous 
preliminary conditions have been advanced that Pyongyang must 
meet before the recognition may take place. 
 
Now, according to experts in Moscow, the DPRK is in a much weaker 
position internationally, as well as economically, militarily, 
and socially. Under these circumstances, the North will never 
agree to a meaningful dialogue and rapprochement with the South. 
First, it has to obtain stronger international position and get 
more guarantees of support from the great powers involved in the 
Korean settlement. Even if Pyongyang aims at isolating Seoul by 
promoting a bilateral dialogue with the USA, the ROK should not 
be overly concerned. The Americans are not about to abandon the 
South for friendship with the communist North. Besides, the DPRK 
in the process of opening up to the United States and Japan will 
start changing. As a result, it will become ready to enter into a 
constructive relationship with the ROK. 
 
Experts in Moscow similarly believe that Russia should welcome 
rapprochement between Washington and Pyongyang, and that China 
should not object to the normalization of North Korean-Japanese 
relations. Seoul is also advised to react more reasonably to the 
situation in Moscow-Pyongyang relations. Russians recall that 
back in the 1980s, South Korea decided to develop the Soviet 
connection precisely because Moscow seemed  to be able to 
influence the North Korean leadership in a positive direction. 
However, as soon as the Kremlin and the Blue House formalized 
mutual relations, Seoul began to pressure Moscow against 
continuation of military and other aid to the DPRK. When Russia 
did downgrade its cooperation with the North, the South, instead 
of being satisfied, lost respect for the Kremlin--since it now 
lacked leverage vis-à-vis the North. Moscow took this reaction of 
the ROK into account and decided to restore normal ties with the 
DPRK. To the Russians’ surprise, however, Seoul is again unhappy 
and suspicious about Moscow’s intentions. 
 
The third principle is non-interference of the "six" in the 
internal affairs of each other. Russian experts acknowledge that 
lately both Seoul and Washington have been underlining their 
resolve not to undermine the communist regime in the North. 
Nevertheless, Pyongyang has reasons not to trust those 
statements. This is not surprising since, just a few years ago, 
when communist governments in Eastern Europe were falling, the 
South Korean elite was striving openly for the demolition of its 
opponent’s regime in the North. Democratic Russia initially also 
welcomed the prospect of the destruction of the Kims’ kingdom. As 
for the United States, it seriously contemplated a "preventive 
strike" in 1992-93 against the DPRK’s nuclear installations. 
Clearly, the fears of North Korean leaders cannot have been 
alleviated this quickly, especially under conditions of the 
progressive weakening of the DPRK in all spheres. 
 
The following conclusion is made in Moscow: only if the  above-
mentioned principles are applied and consistently observed by the 
six sides will real prospects for détente on the Korean Peninsula 
open up. On the basis of this reasoning, the Kremlin has advanced 
a proposal to hold a multinational conference with the purpose of 
creating a mechanism for the overall settlement of the problems 
of the Korean Peninsula. Russia believes that besides the "six," 
it is advisable to invite to the conference all remaining
permanent members of the U.N. Security Council (France, Britain) 
as well as the Secretary General of the United Nations and the 
General Director of the IAEA. Observers from other interested 
parties (like ASEAN) could also attend the conference. The 
following agenda is suggested by Moscow:  
 
1. Improvement of North-South relations; 
2. Replacement of the armistice regime with a peace structure;  
3. Confidence-building measures on the Korean peninsula; 
4. Achievement of a non-nuclear status for the Korean peninsula 
and creation of a zone free from all weapons of mass destruction; 
5. Normalization of relations among all participants of the 
conference. 
 
According to the Russian plan, the United States and Japan should 
declare on the eve of the conference their intention  to 
recognize the DPRK diplomatically. During the conference,  
practical aspects of the recognition could be solved.   

The conference would start with a meeting of foreign ministers 
who would confirm the agenda of the conference and set up working 
groups. Each of the five above-mentioned topics could be tackled 
by a separate working group. The Russian Foreign Ministry has 
prepared detailed proposals for the solution of the problems in 
all five areas.  
 
3. Attitudes in China towards North Korea 
 
In the official communiqués and speeches Chinese and North Korean 
leaders insist that Beijing and Pyongyang are "as close as teeth 
and lips" and that their friendship is "eternal and unbreakable." 
This might be true as far as the top leaders of the two countries 
are concerned. However, in other circles of Chinese society, the 
depth of the devotion to their North Korean "brothers" seems to 
be questionable.  
 
A group of Russian experts on Asia has just come back from an 
extensive trip throughout China. There they had conversations 
about North Korea with numerous middle-level officials, scholars, 
journalists, businessmen, and common people. On the basis of 
these conversations, the following conclusions can be drawn.  
 
First, the Chinese have a very low regard for the North Korean 
regime. At a dinner in Zhejiang province, the Russians asked a 
local government functionary if the province had "sistership" 
relations with foreign provinces and cities. The functionary 
named a whole list of such partners: in  Europe, Asia, and 
America. The guests ventured to ask the Zhejiang official: "What 
about North Korea?" The question drew loud laughter from this 
official and all other Chinese participating in the dinner. 
Explaining the reasons for this laughter, the Chinese called 
North Korea "a strange country," "an absolute feudal state," and 
"a land of bizarre events."

On other occasions, Chinese scholars in Fujian province and 
Beijing described the North Korean economy as "deformed, twisted, 
and lacking sense and vitality." A journalist from the province 
of Liaoning questioned Kim Jong Il’s legitimacy as the national 
leader. Many students of Beijing University, when asked if they 
were interested in visiting North Korea, stressed that they "were 
ready to go anywhere but not to that weird country." Just one 
fisherman from Hainan island praised North Korea as "the only 
true socialist state remaining in Asia." The reforms in China 
obviously had not brought any positive results to this man so 
far. 
 
The experts’ second conclusion on the Chinese attitude towards 
Pyongyang is that quite a few Chinese don’t believe in a good 
future for Kim Jong Il’s regime. A prominent journalist said: 
"Unless Pyongyang undertakes reforms, the ruling circles will be 
swept away. The economy of the DPRK does not work any longer." 
Chinese scholars stress that without giving land to farmers for 
their personal use, North Korea will continue to suffer from 
shortages of rice and vegetables. Conditions will become more and 
more severe. Eventually, riots will take place and the 
leadership’s unity will be undermined. Kim Jong Il will be openly 
challenged as an inept leader. The ensuing fighting will bring 
about the disintegration of authority. Chinese observers also 
stress that a modern society cannot function on the basis of one-
man, absolutist rule: decisions are bound to be biased, 
primitive, and unachievable. As for the masses, one Chinese 
journalist said that they could not display social and economic 
creativity under such a totalitarian regime. The common view 
expressed in China is that the days of the present regime in 
Pyongyang are numbered; in three to five years it will have to 
give way to a more sensible government and policies. 
 
A third conclusion drawn from conversations with various Chinese 
is the most striking. Time and again the Russians  asked their 
Chinese friends what Beijing’s reaction would be if, 
unfortunately, a war broke out in Korea. The answer was 
unanimous: "We’ll stay away from that war." The guests tried to 
rephrase the question: "Suppose the Americans participate in the 
conflict and overrun North Korean positions and advance to the 
border with the PRC?" The typical answer was stunning: "So what? 
The United States would never dare to attack China anyway. We are 
too big and powerful for America. Besides, in any case, why would 
the Americans want to attack us?" 
 
The Russian visitors asked time and again: "But don’t you care 
about the survival of a China’s ally, a socialist state, and an 
old friend?"  The Chinese responded, "North Korea is not our real 
ally."  One Shanghai-based expert explained, "Look, South Korea 
and the United States proposed recently to hold four-power talks 
on the Korean issue.  Pyongyang refrains from giving a positive 
answer. Why? Because they don’t want China to participate! Is 
this the behavior of an ally?" 
 
The guests from Russia reminded their Chinese acquaintances that 
China had sacrificed hundreds of thousands of soldiers in the 
Korean conflict of 1950-53.  Had they forgotten this fact and 
were they therefore indifferent to the fate of the  DPRK? The 
Chinese explained: "We have not forgotten. However, Pyongyang 
pretends that it won the war on its own, as if it was not our 
Chinese volunteers who saved the North Korean regime from 
annihilation." 
 
The Russian side responded, "But what about top Chinese leaders? 
Some of them personally fought in that war. Do they  have a 
special attachment to Pyongyang?"  The Chinese responded, "No 
such leaders are left in the government." One of them added: 
"Maybe you are right. Maybe our leadership will get involved in 
the next Korean conflict. However, the entire Chinese people 
would be against it. This kind of involvement would ruin China’s 
reforms and future."  
 
This last phrase summarizes the key point: China’s and North 
Korea’s societies have gone so much in different directions that 
their interests--strategic, political, and economic--are becoming 
incompatible. As a result, such indifferent (and even hostile) 
attitudes--as those cited above--exist in China regarding the 
DPRK and its eventual fate.

ICIP
Moscow