Build-up of Self-Reliant National Economy

North Korea¡¯s guidelines for economic policies are build-up of the self-reliant national economy that ¡°can meet the domestic demand on its own and fulfill the needs for technological revolution and material conditions for enlarged reproduction¡± based on the principle of self-reliant rehabilitation. However, recognizing the limitations of the attempts for economic development through purely internal mobilization in the 1980s, it has moved to adopt more pragmatic lines, emphasizing the need for foreign trade and economic cooperation with other nations.

Proclamation of the Rajin-Seonbong Free Economic Zone and enactment of the Law on Attraction of Foreign Investment are the examples in addition to its newly-expressed strong interest in the trade and economic cooperation with the South and the promotion of the Mt. Kumgang Tourism Project. However, it sticks to the time-worn self-reliance in national economic lines, emphasizing ¡°we must stand up against the imperialists¡¯ attempts to make the world economy subordinated to them. 

"Heavy Industry First" Policy

North Korea has consistently promoted the economic development policies that places top-priority on heavy industry, trumpeting that heavy industry is the foundation of the development of people¡¯s economy. With unreasonably lop-sided promotion of heavy industry, there has been deepening structural imbalance between industries, which resulted in dilapidation of agriculture and social overhead capital. Nonetheless, the North is still emphasizing the importance of heavy industry as part of its efforts for normalization of the ¡°priority sectors¡± such as power supply, coal mining and metal production which were dealt a severe blow in the structural recession. 

Parallel Development of Military Strength and Economy

In an effort to pursue the policy of developing the economy and strengthening the military strength at the same time, the North has developed its industries in a military-industry complex type, linking the heavy industry with the munitions industry. Thus, its munitions industry is indistinguishable from the civilian supply industry, as it is deeply linked with the heavy industry centered around the mechanical industry.

People's consumption must be controlled in order to promote the dual goals of strengthening its military strength and developing the economy. As a result, the people are forced to endure the extreme difficulties in shortage of articles of everyday consumption.  


Evaluation on the last year's foreign economic activity of North Korea

Diplomatic Results

Last year was the year that North Korea's diplomatic activity was very active to the extent that no such history can be found, and that it came closer to the international society, getting out of isolation. The step to make a diplomatic relations with Italy announced on Jan. 3, the very beginning of the year, was a signal telling the beginning of North Korean forward-looking diplomacy, and the normalization of the relations with Great Britain, a closest ally of the US, after the restoration of the ties with Australia and forming a friendly relations with the Philippines, was a very significant development. , .

It is forecast that North Korea will also establish diplomatic relations with more advanced western countries this year. We expect that currently progressing negotiations to make friendly relations with EU nations such as Germany, Spain, the Netherlands and Belgium, and Canada and New Zealand will bear fruitful results during the first half of this year.

The crossing visits between Vice Marshal Jo Myong Rok, No.3 man in North Korea's power system, and US Secretary of State Albright were made, and the relations with the US developed further to the extent that President Clinton's visit to North Korea is reviewed seriously.

We cannot ignore the restoration of the relations with China and Russia, former major diplomatic counterparts. The conclusion of a treaty on 'North Korea-Russia Goodwill, Good Neighbor and Cooperation' in February and Putin's state visit to North Korea in July turned the estranged relations since forming of North Korea-Soviet Union's amity relations into new friendly relations.

With regard to the relations with China, both nations reassured traditional ties and actual cooperative relations through the meeting with President of the presidium of the Supreme People's Commission Kim Yong Nam and Chinese Foreign Minister Tang Jiaxuan in 1999, ensuing unofficial visit to China by Chairman of the National Defense Commission Kim Jong Il before South-North Korea Summit Talks and Foreign Minister Paek Nam Sun and Minister of the Ministry of People's Armed Forces Kim Il Chol's visits to China. Above all, the fact that North Korea is recognized as a cooperative partner, getting out of so called 'bad nation' image in the international society through the Summit Talks between South and North Korea can be evaluated as the most remarkable fruitful result.  

Results in the area of foreign economic cooperation

Although there were no visible results in the area of foreign economic cooperation, we could find some signs of change in many areas.

Last June, a measure to ease US economic sanctions against North Korea, announced but postponed continuously, started to take effects. Even though its effects are not visible much, since North Korea was not excluded from the list of terrorism supporting nations, the symbolic significance of the measure was great.

The fact that US Startech Co. agreed with Korean Communications Enterprise of North Korea on the Internet communications business and that Oro Co. agreed with North Korean Magnesia Clinker Co. to cooperate in exporting of North Korean magnesia overseas showed the visible signs of change symbolically. Although it was regretable that the attempted dispatch of a commercial mission to North Korea by US Chamber of Commerce to South Korea was not successful, it became an opportunity to show US enterprises' enhanced interests.

It is also noteworthy that exchanges between North Korea and the nations that made diplomatic ties are expanding. North Korea concluded a pact on investment guarantee, economic cooperation and cultural & scientific cooperation with Italy in last September, and after that, Italian Industry & Trade Minister visited North Korea. It was known that the president of Benetton, as a businessman, tapped a business possibility by visiting North Korea. The visit to North Korea by an economic delegation of Italy is scheduled next year.

Australia also dispatched a market survey delegation of a national foreign trade promotion agency in August, and it was known that an energy related business mission visited North Korea and consulted the cooperative businesses such as maintenance of electric power system. In November, when Australian Foreign Minister visited North Korea, a letter of understanding to promote the cooperation for agricultural technology between the two nations was signed .

It is also remarkable that a jointly ventured multinational corporation between Sweden and Switzerland, Asea Brown Boveri (ABB) made a cooperative agreement with North Korean government. At the end of November, the CEO of ABB visited North Korea himself and agreed to the business of modernizing the nationwide electric power distribution network of North Korea with the Ministry of Metal and Machine-Building Industries and Ministry of Power and Coal Industries. They also agreed to participate in the various electricity & power plant facilities and industrial facilities improvement businesses. The fact that a world-leading multinational corporation started to participate in the development of North Korean social overhead capital area is very significant.

At the same time, the fact that Snowy Mountains Engineering Corp., an Australian engineering consulting company, visited North Korea last July and checked the appropriateness of the project to modernize Pyongyang's water supply and drainage, which receives assistance from a Kuwait fund, is significant in that it is the infrastructure development utilizing a third nation's fund.

As economic situation tuned somewhat favorably, overseas purchase centered on the equipment goods became active. Beginning with dispatching a light-industry-machinery-equipment purchasing mission to Taiwan, the import of cars and buses increased substantially including the importation of 100 cars from Belarus. North Korea imported beer plant facilities from Great Britain and attempted to introduce light airplanes from Poland, which was not successful.

As for inducement of foreign investment, its overall performance is presumed to be minimal, in spite of the reports that some Chinese and Hongkong corporations invested in North Korea. North Korea's investment inducement activity also shrank, since even North Korea's pertinent institutions didn't make much effort in inducing foreign investment, differently from the past, .

Foreign trade promotion activity through international exhibitions has not been activated yet. At the Pyongyang International Exhibition held in May, only 22 companies (Most of them were Chinese and Taiwanese companies.) from 9 countries as overseas businesses participated in the exhibition. It seems that the activity to promote foreign trade didn't reach the full-fledged stage yet, given that the number of hosting of the overseas exhibitions and participations in overseas fairs didn't surpass much the level of 1999.  


Direction of the foreign economic policy

It is expected that North Korea will actively pursue foreign economic cooperation this year based on the fruitful diplomatic results achieved last year.

That North Korea pursued forward-looking diplomatic activity last year was an effort to guarantee its system and acquire economic support simultaneously. The effort to acquire economic support through diplomatic activity is forecast to be strengthened more, given that no sign of economic recovery by its own effort has shown and the electric power and energy troubles are getting deeper.

North Korea had evaluated in the commentary of Rodong Sinmun on Dec. 18 last year, "Gradually higher international interests in our country and many countries' intentions to improve the relations with us are becoming an irresistible flow." In the new year's greeting address this year, North Korea also revealed, "We will improve the external relations with any country that respects our sovereign rights and will contribute to the autonomization of the world and the great undertaking of humankind's peace actively." In view of all these, North Korea is likely to solidify foreign relations much more.

The fact that North Korean Finance Minister and Central Bank Governor were changed last October, and in the wake of it, that Foreign Trade Minister was reinforced with a young man in his 40s last December is analyzed as showing North Korean authorities' strong will to pick up the economy through actualization of foreign economic cooperation.

There are, however, some sceptical opinions on the possibility of the western world's actual economic cooperation with North Korea. If economic cooperation with foreign corporations to be in full-swing stage, a certain level of condition requested internationally should be met, but there is no movement of internal reform to do so. Therefore, the opinion, asserting foreign economic cooperation might not expand in spite of the diplomatic performances, is also strong.

The increase of exchanges with the international society can be an opportunity for North Korea to feel the need to change strongly. In the process of discussing economic cooperation, the western world is highly likely to demand North Korean authorities' internal change. The surge of exchanges with the nations that formed new amicable relations with North Korea gives the sense of expectation that the improvement of diplomatic relations can be linked to the economic cooperation and that it also can bring the change of North Korea.

This year's activity for foreign economic cooperation by North Korea is forecast to maintain last year's basic policy. It appears that efforts for the expansion of commercial cooperation with nations that signed diplomatic relations, strengthening of external cooperation to develop social overhead capital and acquirement of economic support to overcome economic hardship will be solidified.

Expansion of the exchanges for commercial cooperation

It is a general process in which the establishment of diplomatic tie is developed into economic relations as a next step. Accordingly, as more countries form diplomatic relations with North Korea this year, external commercial cooperation also is likely to increase.

Italy that signed an economic agreement guaranteeing investments as well as diplomatic tie last year plans to dispatch an economic mission during the first half of this year to realize the cooperative business in full swing. Sweden and the Netherlands are also scheduled to dispatch economic missions. Taiwan is slated to send a market survey group led by CETRA, its trade promotion agency, and Japan also plans to dispatch a large-scale delegation led by East Asia Trade Research Association to Pyongyang International Exhibition.

The Pyongyang International Exhibition, which had not been much successful until last year, seems to play an important central function in foreign economic cooperation this year. North Korean authorities also try to attract much more participations of foreign companies compared with previous years and the exhibition scale will be extended to 5,000 sq m. It is expected that trade through a fair will be active, since Japan's East Asia Trade Research Association plans to send a large-scale delegation, and many companies of Taiwan, of which 9 companies joined the exhibition last year, are also scheduled to participate in it.

Strengthening of the efforts to develop the social overhead capital facilities

The foreign capital inducement policy as a form of economic special zone development such as intensive investment inducement in Rajin-Sunbong Region seems to be weakening relatively and the cooperation with & investment inducement toward foreign companies to improve social overhead capital (SOC) will be presumably solidified. The signing of an agreement in the electric power area with ABB and the appropriateness investigation of the project to modernize Pyongyang's water supply & drainage by Australian SMEC appear to be a signal to this direction.

Since the loans from the international financial institutions as the source of funds to develop SOC are the most promising, North Korea is forecast to attempt to improve the relations with these institutions. The efforts for the negotiations with the US will be enhanced, because the US representative is supposed to oppose the supply of loans from the international financial institutions, unless North Korea is excluded from the terrorism supporting nations' list.

We cautiously predict that areas of electric power and land transportation such as roads and railways will be developed above all, if once the loans from the international financial institutions are supplied. There is a case in which Vietnam propelled a road construction project by receiving loans from IMF and ADB, when the US withdrew the opposition on the supply of the loans from the international financial institutions before Vietnam established the diplomatic relations with the US.  

Efforts to acquire economic support for overcoming economic difficulties

North Korea's economy recorded plus growth rate in 1999 and the growth trend is forecast to continue last year as well. This growth trend can be largely attributed to South-North Korean economic cooperation business and foreign countries' support. Especially, in the settlement of food crisis, foreign countries' assistance was crucial.

North Korea received 600,000 tons of food assistance from the US, and 150,000 tons of food and 400,000 tons of coking coal from China through diplomatic negotiations in 1999. Last year, it received the support of 600,000 tons of food from Japan and also from Korea another 600,000 tons of food. (500,000 tons were loan type and 100,000 tons were free.) North Korea received $6.51 million worth of assistance from Australia as well, which made a diplomatic relations with it last year, and other international society such as Food and Agriculture Organization supported it with tens of millions of dollars.

Considering the announcement of North Korean authorities that its food harvest declined 1.4 million tons due to natural disasters in 2000, diplomatic efforts to receive food assistance will be heightened. Especially, assistance requests to the nations under negotiations to open diplomatic relations are predicted. The nations that can support North Korea, however, are limited, therefore, the burden to support North Korea is likely to fall on the hands of China, Japan, America and South Korea in the end.  

Matters to be required for the expansion of foreign economic cooperation

Change of the internal economic system

Although, macro-situation progresses in the direction that the economic exchanges between North Korea and the international society expand, there still exists some questions about whether the exchanges can be developed into actual cooperative affairs in terms of micro-perspective.

It is true that external world has strong sceptical views on whether North Korean internal environment can guarantee business activity sufficiently and whether there is profitability in doing business with North Korea, let alone the credibility issue of North Korea.

It is pointed out that there is no change inside of North Korea, although its external negotiations are active. So far, even though many laws were enacted to induce foreign investment, free activity of a company is not guaranteed actually. It's hard to find a remarkable successful case of the advanced businesses to North Korea.

While the World bank raised the problems related to investing in North Korea such as the exchange rate & price system not reflecting actual value, lack of credibility of the statistical data, lack of recognition of business and above all the perceptive differences on the management and labor management as well as the issues of expansion of SOC facilities and law system, the bank stressed the need of education to improve such problems, which can be regarded to have pointed out the matters for North Korea to improve rather precisely.

North Korea needs a long-term strategy to search for a co-existent way that can guarantee profits to the investing foreign corporations as well through the change of its internal system, not just sticking to immediate economic profits, while paying attention to these external views.

Western world's cooperation to settle the change of North Korean system

North Korea already admitted that its new targets for economic cooperation should be the advanced western countries as the socialist economic cooperative system collapsed in the beginning of the 1990s. However, it depended on the strategy to settle the issue with military assets such as nuclear bombs and missiles not on the normal economic exchanges, which caused the opportunity to recover economy to be lost and led unsuccessful actual results.

It is very desirable that North Korea set up a policy to expand economic cooperation, from the previous year, through normalization of the relations with the western world, escaping from isolation . Still, the policy is not solid enough yet and there will be many disputable factors inside of North Korea. As the exchanges with the western world expand, the decisive time to reform North Korea's internal system is approaching, and the time could be this year.

The western world's interests in economic cooperation and efforts for it are necessary for North Korea to make a rational decision to get out of economic isolation. At the same time, the attitude urging North Korea to change to be acknowledged as a member of the sound international society is also needed. Because North Korea thinks that it did what it could do so far, some are disappointed at the fact that the foreign investment was not induced as expected, therefore, there will be some internal opposition against the change. If confidence on the maintenance of the system and economic recovery is constructed through the formation of credible relations with the western world, North Korea's open change might settle down as a solid policy.  

* This writing is the manuscript that was carried in the Jan. and Feb. issues of 'The Economics of Korean Reunification' published by Hyundai Research Institute.