A Doomed Reform: North Korea Flirts with the Free Market. (World in Review)

By Sandhu, Harpal | Harvard International Review, Spring 2003 | Go to article overview

A Doomed Reform: North Korea Flirts with the Free Market. (World in Review)


Sandhu, Harpal, Harvard International Review


After the fall of the Soviet Union, world politics shifted away from the conflict between communism and capitalism that had characterized much of the 20th century. But in northeast Asia lies one of the last relics of the Cold War and the last Stalinist state, the Democratic People's Republic of Korea, commonly referred to as North Korea. Ruled by a dictatorship that sheltered its citizens from the putative poison of decadent Western culture and influence, North Korea existed in almost complete isolation from the West for decades. However, recent economic reforms and attempts at fostering political discourse with its neighbors mark a conspicuous departure from previous foreign and domestic policy for this international enigma. Once a staunch proponent of communism and national self-reliance, or juche, North Korea has devalued its currency 70-fold, allowed prices and wages to, be determined by markets, partially eliminated rationing, and announced the creation of a Chinese-style special economic zone (SEZ) ope n to foreign investment. This arrangement is radically different from traditional North Korean socialism.

On the political front, North Korea has re-opened dialogue with Japan, admitted abducting 13 Japanese citizens in the 1970s and 1980s, begun limited de-mining of the Demilitarized Zone (DMZ), and agreed to the creation of the first railroad link between the two Koreas since World War II. As promising as these developments appear, however, North Korea is unlikely to begin an immediate economic revival like the one China experienced two decades ago. North Korea's unusual new economic reforms and diplomatic initiatives are misguided attempts to reinvigorate a decaying economy and curry international favor and concessions. In the long run, many of its economic changes and diplomatic maneuvers may prove self-defeating.

Only a serious crisis within the economy could persuade North Korea's government to change its socialist ways. The dramatic decline of the North Korean economy began with the loss of Soviet subsidies and trade following the collapse of the Soviet Union in 1991. North Korea's exports plummeted while its leader, President Kim Il-Sung, refused to reduce imports. Furthermore, military expenditures continued at a level that enabled this country of slightly more than 22 million people to maintain the third largest army in the world. The results were disastrous--gross domestic product (GDP) fell by 50 percent between 1992 and 1997. Worst of all, a devastating famine engulfed North Korea, forcing the reclusive government to appeal to the World Food Programme for aid. While help did come, the humanitarian group Doctors Without Borders estimates that at least 10 percent of the population perished. With a decimated population, a decade of economic recession, and a dearth of communist allies, North Korea has begun to in fuse capitalist elements into its supposed workers' paradise.

Getting Ahead

Logic would dictate that North Korea, which is devoid of any substantial capitalist experience in the last half-century, should begin reform with baby steps. Instead, the government has embarked on several dramatic reforms. Beginning in summer 2002, the North Korean government lifted most price controls and allowed market forces to set prices by supply and demand. Although initial results do not necessarily predict the future, the new policies created huge discrepancies and asymmetries in the economy. While average wages increased 200 times, the price of rice rose 400 times, diesel fuel 40 times, and electricity 60 times. Furthermore, the North Korean government has made no move to integrate private enterprise into the economy, an omission that could cause catastrophic problems in the future. Allowing demand to run rampant while limiting supply by suppressing private enterprise only exacerbates inflation. On the other hand, in a move that foreshadowed the new SEZ and desire for foreign investment, the govern ment slashed the official value of the North Korean currency from the rate of 2. …

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