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World > Asia > Korea, North > Economy (Notes)

Korea, North - Economy (Notes)


ECONOMY
North Korea's economy declined sharply in the 1990s with the end of communism in Eastern Europe, the disintegration of the Soviet Union and the dissolution of bloc-trading with the countries of the former socialist bloc. Gross national income per capita is estimated to have fallen by about one-third between 1990 and 2002. The economy has since stabilized and shown some modest growth in recent years, which may be reflective of increased inter-Korean economic cooperation. But output and living standards remain far below 1990 levels. Other centrally-planned economies in similar straits opted for domestic economic reform and liberalization of trade and investment. North Korea formalized some modest wage and price reforms in 2002, and has increasingly tolerated markets and a small private sector as the state-run distribution system has deteriorated. But the regime seems determined to maintain control. In October 2005, emboldened by an improved harvest and increased food donations from South Korea, the North Korean Government banned private grain sales and announced a return to centralized food rationing. However, reports indicate this effort to reassert state control and to control inflation has been largely ineffective. Another factor contributing to the economy's poor performance is the disproportionately large share of GDP (thought to be about one-fourth) that North Korea devotes to its military.

North Korean industry is operating at only a small fraction of capacity due to lack of fuel, spare parts, and other inputs. Agriculture is now 30% of GDP, even though agricultural output has not recovered to early 1990 levels. The infrastructure is generally poor and outdated, and the energy sector has collapsed. About 80% of North Korea's terrain consists of moderately high mountain ranges and partially forested mountains and hills separated by deep, narrow valleys and small, cultivated plains. The most rugged areas are the north and east coasts. Good harbors are found on the eastern coast. Pyongyang, the capital, near the country's west coast, is located on the Taedong River.

North Korea experienced a severe famine following record floods in the summer of 1995 and continues to suffer from chronic food shortages and malnutrition. The United Nations World Food Program (WFP) provided substantial emergency food assistance beginning in 1995 (2 million tons of which came from the United States), but the North Korean Government suspended the WFP emergency program at the end of 2005. It has since permitted the WFP to resume operations on a greatly reduced scale through a Protracted Relief and Recovery Operation. External food aid now comes primarily from China and South Korea in the form of grants and long-term concessional loans. South Korea also donates fertilizer and other materials, while China provides energy. South Korea suspended food and fertilizer shipments to the North in response to North Korea's missile launches in July 2006. However, when severe floods later that month threatened to produce another humanitarian crisis, South Korea announced a one-time donation of 100,000 tons of food, matching contributions from South Korean non-governmental organizations (NGOs). South Korea resumed fertilizer shipments to North Korea in late March 2007.

Development Policy
In 1991, following the collapse of the Soviet Union and termination of subsidized trade arrangements with Russia, other former Communist states, and China, North Korea announced the creation of a Special Economic Zone (SEZ) in the northeast regions of Najin (sometime rendered 'Rajin'), Chongjin, and Sonbong. Problems with infrastructure, bureaucracy, and uncertainties about investment security and viability have hindered growth and development of this SEZ. The government announced in 2002 plans to establish a Special Administrative Region (SAR) in Sinuiju, at the western end of the North Korea-China border. However, the government has taken few concrete steps to establish the Sinuiju SAR, and its future is uncertain. In addition, North Korea and South Korea have established a special economic zone near the city of Kaesong, where about 20 South Korean companies operate manufacturing facilities employing North Korean workers (see further information under North-South Economic Ties).

North Korea implemented limited micro- and macroeconomic reforms in 2002, including increases in prices and wages, changes in foreign investment laws, a steep currency devaluation, and reforms in industry and management. Though the changes have failed to stimulate recovery of the industrial sector, there are reports of changed economic behavior at the enterprise and individual level. One unintended consequence of the 2002 changes has been severe inflation. An increasing number of North Koreans now try to work in the informal sector to cope with growing hardship and reduced government support.

North-South Economic Ties
Two-way trade between North and South Korea, legalized in 1988, had risen to more than $1 billion by 2005, much of it related to out-processing or assembly work undertaken by South Korean firms in the Kaesong Industrial Complex (KIC). A significant portion of the total also includes donated goods provided to the North as humanitarian assistance or as part of inter-Korean cooperation projects. Although business-based and processing-on-commission transactions continued to grow, the bulk of South Korean exports to North Korea in 2006 was still non-commercial.

Since the June 2000 North-South summit, North and South Korea have reconnected their east and west coast railroads and roads where they cross the DMZ and are working to improve these transportation routes. However, the railroads have not been tested to date. Much of the work done in North Korea has been funded by the South. The west coast rail and road are complete as far north as the KIC (six miles north of the DMZ), but little work is being done north of Kaesong. On the east coast, the road is complete but the rail line is far from operational. Since 2003, tour groups have been using the east coast road to travel from South Korea to Mt. Geumgang in North Korea, where cruise ship-based tours had been permitted since 1998.

As of February 2007, 21 South Korean firms were manufacturing goods in the KIC, employing nearly 9,000 North Korean workers. Most of the goods are sold in South Korea; a small quantity is being exported to foreign markets. Ground was broken on the complex in June 2003, and the first products were shipped from the KIC in December 2004. Plans envision 250 firms employing 350,000 workers by 2012. South Korea's Ministry of Unification announced in September 2006 that it was postponing further expansion plans in light of heightened tensions following the North's ballistic missile launches. Despite the September decision, pre-existing agreements to build or operate new factories are being executed.

Economic Interaction with the United States
The United States imposed a near total economic embargo on North Korea in June 1950 when North Korea attacked the South. Sanctions were eased in stages beginning in 1989 and following the Agreed Framework on North Korea's nuclear programs in 1994. In June 2000, a U.S. Executive Order legalized most transactions between U.S. and North Korean persons. It allowed most products, other than those specifically controlled for military, non-proliferation, or anti-terrorism purposes, to be exported to North Korea without an export license. Restrictions on U.S. investments in North Korea and travel of U.S. citizens to North Korea were also eased, and U.S. ships and aircraft were allowed to call at North Korean ports. To date, however, U.S. economic interaction with North Korea remains minimal, licenses are still required for imports from North Korea, and North Korean assets frozen since 1950 remained frozen. In January 2007, pursuant to UN Security Council Resolution 1718, the U.S. Department of Commerce issued new regulations prohibiting the export of luxury goods to North Korea. Many statutory sanctions on North Korea, including those affecting trade in military, dual-use, and missile-related items and those based on multilateral arrangements, remain in place. Most forms of U.S. economic assistance, other than purely humanitarian assistance, are prohibited. North Korea does not enjoy 'Normal Trade Relations' with the United States, so any goods manufactured in North Korea are subject to a higher tariff upon entry to the United States.

Points of Contact for U.S. regulations concerning economic activity with North Korea: Treasury--Office of Foreign Assets Control, Tel. (202) 622-2490, http://www.treas.gov/ofac; Commerce--Foreign Policy Controls Division, Bureau of Industry and Security, Tel. (202) 482-0171; Transportation--Office of the Assistant General Counsel for International Law, Tel. (202) 366-9183.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions
Notes and Commentary: People - Economy - Government and Political Conditions - Foreign Relations - Relations with U.S.



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Notes and Commentary
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