Could North Korea Have Struck It Rich?

Whatever the opposite of the Midas touch is, North Korea’s leaders seem to have it. Located in a region where all of its neighbors have experienced remarkable economic growth, the North Korean economy has stagnated for more than two decades. For the last several years, North Korea’s leadership has promised a new dawn of prosperity by April 15, 2012, the 100th birthday of the country’s founding leader Kim Il Sung. Instead, the country has bounced from an avoidable famine in the mid-1990s to a disastrous currency reform in 2009 to a costly — and failed — missile launch earlier this week. The country now has an annual per capita income of about $1,000, roughly the same as Pakistan. Did it have to be this way?

It’s not as if the North Koreans haven’t thought about development. In 1998, after a famine that killed between 600,000 and a million people, Dear Leader Kim Jong Il rolled out two new concepts that have served as the core ideological and propaganda pillars of the regime ever since: "military first politics" (songun) and the objective of becoming a "strong and prosperous nation" (kang song dae guk). The latter involved achieving ideological and military as well as economic strength. The regime proved its ideological resilience by sticking with socialism and surviving the collapse of communist rule in the Soviet Union and Eastern Europe. Testing nuclear weapons in 2006 and 2009, and a long-run missile this week, was meant to demonstrate military strength.

That left economic growth. North Korea has failed miserably in this area, but we can speculate about what might have been. Other countries in the region, like Japan and China, have sustained economic growth in excess of 8 percent for several decades. Many began in equally inauspicious circumstances: South and North Koreans were on par in the 1950s, but South Korean incomes are now more than 20 times higher.

For North Korea to have succeeded would have required a fundamental change in mindset: greater openness to the international economy, willingness to admit mistakes and seek help, and an earlier recognition of the benefits of trading with China. Above all, the leadership would have had to allow the organic, home-grown market economy more space to develop. If, from the end of the Cold War in 1990, North Korea had started making sensible economic decisions, its per capita income could have tripled from 1990 to the present, putting it in league with Ukraine or Morocco.

That’s not, of course, what happened. Heavily dependent on Soviet oil and other inputs, North Korea’s industrial and agricultural sectors went into a steep decline after the 1991 collapse of the Soviet Union. Three years later the only ruler the country had ever known was dead. In South Korea and Vietnam, crises have spurred reforms; North Korea would have needed to act with alacrity.

Some, including the Chinese leadership itself, have argued that North Korea should have simply followed the route pioneered by its larger neighbor by providing greater incentives to farmers. Although that would have helped, North Korea’s limited arable land and lousy weather mean it wouldn’t have gotten the same bump from the agricultural reforms that played a crucial role in the Chinese transition. North Korea should have gone global early, aggressively seeking out foreign investment and expanding exports of manufactured goods and its ample endowment of natural resources.

Such a radical turn in direction seems far-fetched: North Korea derives much of its legitimacy from being the socialist alternative to the South. A rapprochement with Seoul to bring Korean conglomerates such as LG and Hyundai into the country would have looked like capitulation. But the two countries came tantalizing close to détente with a well-crafted North-South political agreement in 1991 that sought to ease tensions on the peninsula. Even a modest and gradual opening to the South would have provided significant gains to the economy in the 1990s when it was hurting the most.

Given the regime’s nervousness about the presence of foreign companies, it could have accomplished this objective by establishing export processing zones that were initially isolated from the rest of the economy, like China did in Guangdong in the 1980s, as well as through joint ventures with China, a less threatening partner. Beginning in the early 1990s, North Korea experimented with such zones in the northeast of the country, near the Russian border, but never prioritized them. Moreover, the leadership was surprisingly slow in seeing the benefits of proximity to China, reading Beijing’s post-Tiananmen massacre reforms as a sign of right-wing deviationism. China has kept North Korea afloat since 2000, but earlier engagement would have accelerated growth.

North Korea has also had a difficult time understanding that nuclear and missile brinksmanship is not good for business. After the collapse of its Soviet patron, an isolated North Korea toyed with a nuclear option as protection. But instead of funneling scarce capital and manpower into an expensive nuclear option and large conventional forces, it could have achieved the same basic security objective by honing a more minimalist conventional deterrent, like the threat of shelling Seoul. Avoiding the first nuclear crisis of 1992-94 would also have helped jump-start the economy by making North Korea a more appealing investment and trade partner.

Even if all of this had gone right, the early 1990s would have been painful. Like Eastern Europe, North Korea would have suffered from a significant transitional recession. But its famine was avoidable. The World Food Program provides an international social safety net against famine, and North Korea subsequently became a surprisingly large recipient of food aid. Countries, however, have to issue an appeal for humanitarian assistance; North Korea didn’t do so until 1995, when disastrous floods provided political cover. If it wanted to remain self-reliant, it could have developed exports to pay for commercial imports of food.

Beginning in 1998, small signs of reform began to appear. In the wake of the famine, the economy had begun to marketize from below as households and work units engaged in trade and barter to secure food. The regime acquiesced, allowing some markets to operate. The government changed the constitution to make at least some room for the market and implemented a major reform package in 2002. These reforms showed some willingness to experiment with a new course, and had an important international dimension as well: The North-South summit of 2000 and rapprochement with Japan and China showed at least some understanding that internal reform and an approach to potential trading partners went hand-in-hand.

This potential breakthrough quickly slammed into the wall of yet another nuclear crisis in October 2002, when the United States discovered that the North was seeking out technology to enrich uranium. Again, a nuclear confrontation diverted attention and resources from economic development, and made North Korea an unappealing location to do business.

From 2005 to the present, North Korean economic policy can best be characterized as "reform in reverse." Markets were opened, then closed, then opened and closed again. A disastrous currency conversion in 2009 confiscated the cash holdings of traders and the savings of households, sending the worst possible signals to those engaged in the market. The missile and nuclear tests of 2009 and the provocations vis-à-vis the South in 2010 all served to underscore the lesson that nuclear brinksmanship is bad for business, except with China. Food shortages since 2008 have been as bad as any time since the great famine.

This period also highlighted another distressing feature of North Korea’s economy: the regime’s fascination with technological fixes. The regime has channeled resources into missile and nuclear technology and information-technology ventures while remaining unable to feed its population. The problem is the common fallacy that poor countries become rich by acquiring the technological trappings of rich ones. But premature investment in high-tech white elephants diverts from spending on food, consumer goods, and investment in basic health and education. The failed missile launch, meant to signify that North Korea is a "strong and prosperous nation," is only the most glaring manifestation a desire to "leapfrog" rather than focusing on the basics.

North Korea did not have to become laissez-faire Hong Kong in 1990 to succeed. But an alternate North Korea that had adopted a more outward-oriented strategy, avoided nuclear confrontations, rang the famine alarm bells in a timely way, pursued gradual reforms, let private markets work, and avoided the lure of quick fixes would now be celebrating some real successes: not like South Korea, but at least the end of widespread malnutrition and the beginnings of sustained development. 

But that, sadly, is not the North Korea of today.