Academic journal article North Korean Review

North Korea's Trade and Foreign Direct Investment: Does North Korea Follow Vietnam's Path?

Academic journal article North Korean Review

North Korea's Trade and Foreign Direct Investment: Does North Korea Follow Vietnam's Path?

Article excerpt

Introduction

North Korea has pursued an ideology of Juche, or self-reliance, since the 1950s and has isolated itself from the world economy. The Juche policy consists of three elements: political independence from all foreign powers, economic self-sufficiency, and military self-defense. North Korea has fostered a military-industrial complex with a belief that promotion of heavy industries would make both its economy and the military stronger. In its development process, North Korea avoided foreign direct investment and neglected international trade relations because of its distrust of foreign powers and its fear of being exploited by Westerners. Until 1960, the actual economic performance exceeded the highly set targets owing to mass mobilization and moral incentives. However, in the long run, the outcome of the Juche policy under a command economy has been disastrous because of a lack of economic incentives and suboptimal decision-making processes by a small political elite.

North Korea's economic crisis occurred in the 1990s, when drought and floods hit the nation, which was already suffering from poor economic performance due to the inefficiency of the command economy. For North Korea, the 1990s were characterized by negative economic growth, with an average growth rate of -4 percent during 1990-98, as shown in Figure 1. After 50 years of implementation of the Juche policy, North Korea has ended up with isolation from the globalized world, poor infrastructure, technological obsolescence, uncompetitive industries, and a povertyridden economy, while other former command economies, such as Russia, China, and Vietnam, have made economic progress with the adoption of a market economy and the implementation of their economic reforms.

Confronted with an economic crisis during the 1990s, the North Korean regime began to introduce economic reforms in 2002, increased its trade with other countries, and opened free trade zones to induce foreign direct investment. Furthermore, the Six-Party Agreement in February 2007 offered various incentives for North Korea. The short-term benefits that North Korea might receive according to the agreement included provision of fuel, which is North Korea's greatest need, and removal of the country from the U.S. terrorist list. In the long run, North Korea may enjoy far greater benefits, which include normalization of external diplomatic and economic relations, the negotiation of bilateral and multilateral trade agreements, the lifting of U.S. and Japanese economic sanctions, and permission for North Korea to join international institutions such as the World Trade Organization (WTO), the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB).

Recent changes occurring in North Korea remind us of what happened in Vietnam during the 1990s. Vietnam started its economic reforms, the so-called Doi Moi, in 1986 with its openness policy. Since then, Vietnam has achieved normal trade relations with the European Union, Japan, and many other countries in the late 1990s and successfully negotiated permanent normal trade relations with the United States, and it succeeded in joining the WTO in 2006. After obtaining normal trade relations with advanced countries, Vietnam's trade has accelerated, which has contributed significantly to the country's economic growth.

The purpose of this paper is to review North Korea's economic reforms and their effects on trade and foreign direct investment, and to examine whether North Korea can be as successful as Vietnam in its pursuit of economic growth. We will also investigate whether there are any institutional constraints preventing its advance to economic prosperity. The second section reviews North Korea's economic reforms. The third section analyzes the trend and patterns of North Korea's trade and foreign direct investment. The fourth section introduces Vietnam's Doi Moi policy and evaluates its economic effects. …

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