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Chapter 2

Malaise into Opportunity

When written in Chinese, the word “crisis” is

composed of two characters. One represents

danger and the other represents opportunity.

—John F. Kennedy

How did North Korea get where it is today, carrying through the end of the cold war, surviving a devastating famine, and remaining a bastion of communism in a world rapidly turning to the free market?

In the 1960s, there were only two industrialized countries in Asia: Japan and the Democratic People’s Republic of Korea. The latter was founded in 1948 on the ashes of Japanese occupation from 1910 to 1945, following the devastation of World War II.

But despite all the destruction and mayhem, socialist North Korea managed to prop up one of Asia’s fastest-growing economies from the 1950s until the beginning of the 1970s. For a long time the country’s growth and gross domestic product (GDP) per capita rivaled that of capitalist South Korea’s, which for a long time was an agrarian and fractious state that depended on the American military presence for protection.

North Korea bolsters a mainly state-run economy, with all bodies reporting to one of three national pillars: the Korean Workers’ Party, the Korean People’s Army, and the Council of Ministers headed by the prime ministers.

But more interesting are the North Korean companies that resemble the South Korean chaebol, conglomerates like Samsung and Hyundai. The government oversees some 200 businesses that, by North Korean standards, would be considered medium and large enterprises, employing at least a few hundred but in some cases more than 10,000 employees.

Some groups, such as the Korea Sonbong Export & Import Company (exporting marine products and importing foodstuffs) and the Korea SEK Company (exporting cartoon films on order and importing movies and fine-art materials), are more focused on a handful of core operations. Other conglomerates have diversified into a wide range of non-core business activities, such as the Korea Rungrado General Trading Corporation (Sindok spring water, marine products, knitwear, clothes, metallic and nonmetallic minerals, natural shell buttons) and the Korea Kwangmyong Trading Group (agricultural produce, marine products, vessel equipment, nonmetallic minerals, clothes, essential oil, processed jewels).

Although diversification tends to be wasteful, companies added business lines partly as a measure to diversify risks in economically uncertain times “due to hostile foreign forces,” according to the government. The diversification also forced businesses into tougher competition with each other, a move that was seen as a countermeasure against waste, as Mr. Ham, a senior official of the State Planning Committee, explained to me. In short, the state didn’t want to have all its eggs in one basket in case a crisis erupted.

With the support of the Korean residents living in Japan since the time of the Japanese colonization, Kim Il Sung founded the country’s largest conglomerate, the Korea Daesong Trading Group. Today it continues to operate under party provision. Daesong was to become a model group for the rest of the North Korean companies, dabbling in a kaleidoscope of sectors like mining, light industrial factories, ginseng cultivation, shops, and even a large and well-managed ostrich farm, which I visited. Like the South Korean chaebol, Daesong also has its own bank that’s set up as a separate business unit but that helps finance its vast operations.

During the first few decades of its existence, the DPRK boasted significant development progress with fast electrification and mechanization. By 1984 the state had six to seven tractors per 100 hectares. It also saw widespread “chemicalization”—that is, more widely used fertilizers and pesticides in agriculture and land irrigation, which increased from 227,000 hectares in 1954 to 1.2 million hectares in 1988.¹

As there were no economic incentives to flee to South Korea, defectors rarely ran off during that period. In fact, the opposite was more common. Among the South Koreans who defected to the North, Ri Sung Gi and Choe Deok Sin were the most famous. Ri, a chemist, ran away in 1950 and was later accused of being involved in North Korea’s nuclear weapons programs when he headed the North Korean Atomic Energy Research Institute. He also played a leading role in setting up the massive Vinalon Complex in Hamhung, producing a garment material that became a symbol of national pride and, as many scholars have argued, the material embodiment of Juche. The DPRK-produced Vinylon, also known as “Juche fiber,” that was produced there has become the national fiber of North Korea and has been used for the majority of textiles. It has outstripped the use of cotton and nylon. Choe was a South Korean foreign minister who defected in 1986 with his wife to North Korea.

Other prominent defectors were O Kil Nam, a South Korean economist who defected with his family in 1985 to Pyongyang and asked for political asylum in Denmark one year later. The final one was Ryu Mi Yong, current chairwoman of the North Korean Chondoist Chongu Party, who defected in 1985 with her husband to Pyongyang.

PATCHING UP THE ECONOMY

Things took a dramatic turn downward in the 1980s, when North Korea’s annual growth dropped substantially to a modest 3 percent per year on average. In the 1990s, the country suffered a further setback when its economy shrank by an annual average of about 4 percent. Most scholars attribute the collapse to the fall of the Soviet Union and Eastern European states, which previously offered food and fuel subsidies to the regime. Combine that with the huge natural calamities such as a drought in the 1990s and, last but not least, structural problems like its obsolete, underinvested state economy.

While global geopolitical changes in the 1980s kick-started China and Vietnam on the road to economic reform, North Korea took no such path. Three reasons explained why the DPRK was less willing to reform than China and Vietnam. First, the U.S. refused to sign a peace treaty with the DPRK, which made the country feel threatened and froze it in a militarized, defense-oriented state. Second, Vietnam was reunited under northern rule in 1975, while mainland China was also a single entity at relative peace (not counting Hong Kong, Macao, and Taiwan). Unlike North Korea, China and Vietnam did not face a significant external political threat, which allowed the two nations to open up gradually without fear of overthrow.

Chinese leaders like to remind their North Korean colleagues of this history. That’s because Beijing hopes to put North Korea on a Chinese growth model. At diplomatic meetings, they explain to North Koreans that the socialist countries in Eastern Europe collapsed because of their reluctance to reform, whereas Vietnam and China undertook pragmatic even if unpopular changes. The official line is that the reforms led them on a path to development, prosperity, and strength. In the eyes of the Vietnamese and Chinese neighbors, socialist countries like North Korea and Cuba needed to make up their minds quickly.

One analysis by Bank of America-Merrill Lynch, published in early 2012, argues that serious economic reforms would most likely trigger an annual growth rate of 10 to 12 percent—a remarkably high average that exceeds the roughly annual growth of 5 to 8 percent in China and Vietnam. The firm further noted that liberalization would close the income gap between “rich” South Korea and “poor” North Korea. In forty years North Korea may be just over three times poorer than its southern neighbor, compared to forty times poorer if no changes are enacted soon. The report added that the DPRK can achieve this goal if it follows the steps of other emerging economies that decided to join the global economy. It also said that market opening does not necessarily lead to reunification, as the North may opt for a partial open market system like China.

Western advice to the North Koreans is suspected as a sugar-coated plot to overthrow the socialist system, in particular during periods when tensions with the U.S. and South Korea are high. Still, in my own private discussions with senior cadres, they admitted the need to “learn from other countries and adopt elements from them that are beneficial for our country.”

Lately, reform-minded cadres have been getting a new boost from “Kim Jong Un, who has an interest in the knowledge economy and is carefully watching economic reforms in various countries, including China,” said Yang Hyong Sop, vice chairman of the Supreme People’s Assembly, to the Associated Press in a rare interview on January 16, 2012.

North Korea’s official economy began a modest recovery in the 2000s, but annual average growth was meager at 1.5 percent per year during the 2000s. As in countless other poor countries, the informal or “shadow” economy without a doubt grew multifold during the same period. In the absence of reliable statistics, the figures I’ve compiled from different sources, combined with my on-the-ground observations, are merely approximations and not precise data.

But being in the field, I’ve captured a general idea of economic trends that the statistics don’t fully reveal because the government doesn’t publish them. There are emerging bicycle repair spots across the country and more people selling cigarettes, drinks, food, and other goods along streets outside the capital.

But number-crunching didn’t encapsulate the breadth of what was going on. In February 2012, for instance, the South Korean Hyundai Research Institute reported that North Korea’s GDP grew the previous year by a surprising 4.7 percent from a year earlier. But take the figure with a grain of salt. It was based on the think tank’s calculations of grain production, which according to the U.N. Food and Agriculture Organization² grew by 7.2 percent from the previous year. Combine that, the organization argued, with a lower infant mortality rate—a combination of trends that, from an economist’s standpoint, signify growing per capita income and prosperity. The country’s heightened efforts to meet its goal of building “a strong and prosperous nation by 2012” was another cause for this growth rate, although it will be unsustainable without future economic reforms. There were other chance factors, like a good harvest that year and the efforts made in preparation for Kim Il Sung’s birthday.

There appears to be no end in sight for the severe economic problems of the world’s most centrally planned economy. Chronic under-investment from both foreign investors and the government led to an industrial capital stock that was run down to a critical level. Over the past two decades, countless factories have closed; those that continue to run often do so at low-level capacities, thanks to a shortage of raw materials. (North Korea is relatively resource-rich, but the country needs heavy investment to exploit the metals and minerals, as well as foreign equipment and spare parts.) Add that to chronic electricity shortages, and economic prospects get even worse; the lack of electrical power is the largest bottleneck to any industrial development of North Korea. I have visited provincial factories far from the capital where workers slept in the factory at night so they could wait for sudden electrical bursts. When the power came back and the lights went on, the workers jumped to their feet to operate the machines for a couple of hours until the next blackout. They’d sometimes go without electricity for the remainder of the day.

Historically, North Korea had difficulties propping up its industrial economy without sufficient electricity, but the situation was always better before the cold war ended. Thanks to flooding, hydro-power generation dramatically dropped until the mid-1990s. In addition, the coal supply declined and wasn’t enough to feed thermal power plants, because of the end of Soviet subsidies and because many coal mines were flooded in the 1990s.

In the late 1980s, North Korea generated its peak electricity output, estimated at 30 terrawatt-hours. (1 terrawatt-hour is 1 billion kilowatt-hours, the equivalent of the amount of energy that is produced by a 1 million megawatt generator over a period of 1 hour.)

Surprisingly, the World Resources Institute estimated in 2010 that North Korea’s electricity consumption per capita was 600 to 800 kilowatt-hours per year, compared to 402 in India and merely 74 in Myanmar. The estimates seemed impressive, but flawed. They may be based on nominal electricity generation and distribution capacities, versus a much lower actual electricity production and distribution. About two thirds of the power came from dams built mostly under Japanese rule, and the remainder from coal plants—two sources that add up to a decent output, but not enough for the entire country.

In the 1990s, the total power production dropped below 20 terrawatt-hours, according to most estimates. ABB, a firm I represented that worked on power technologies, suggested that the loss of power during transformation and distribution amounted to up to 25 percent. We recommended that the Ministry of Energy Production and Coal Industry allocate more resources for fixing up the country’s electrical infrastructure. The approach would have been far more cost-effective than adding new power stations, and total savings would have corresponded to a substantial double-digit percentage.

Logistics (or the lack of it) has as much to do with North Korea’s food shortages as it does with power shortages. North Korea is home to hundreds of thousands of what were once pristine agricultural machines and trucks. This was because mechanization of agriculture as well as modern transportation (in addition to electrification) was one of Kim Il Sung’s most important goals for the socialist country. After the 1990s, they fell into disrepair. Many are still out of order, and the country can’t get enough spare parts or fuel. A team of foreign experts from the Swiss Development and Cooperation Agency and NGOs estimated that up to 20 percent of the annual harvest rots in the fields and never reaches consumers in the cities. That made the food shortages of the 1990s even worse.

Throughout the 2000s, the state-led business sector has been trying to repair and set up new power stations. The situation today has improved over that of a decade ago, when I arrived in North Korea. Several power stations are being built along the Huichon River, and after 11 years of construction, the largest one, with a power capacity of 300,000 kilowatts, was completed in 2012. Pyongyang is the main beneficiary, and it will suffer from fewer blackouts as a result. The dams will help protect cultivated land and residential areas along the river that have been regularly flooded in the past, helping bring about devastating food shortages. But the total power output remains substantially below the record output at the end of the 1980s, and it’s not clear when or if the nation will return to those days.

North Korea’s ailments partially grow out of its “military first” policy, which gobbles up funds that could go to infrastructure and education and instead puts them in the hands of the nation’s military. The U.S. government put forward figures, possibly exaggerated, suggesting that North Korea is the world’s most militarized country: about a million people, or 20 percent of men aged seventeen to fifty-four, serve in the regular armed forces. That number doesn’t include the substantial reserve force of seven to eight million soldiers out of a total population of twenty-four million. The number pretty much includes every person in their twenties and thirties, who are ready to fight at a moment’s notice.

In addition to being a strong deterrent for potential aggressors, a nuclear arsenal is relatively cost-effective compared to legions of obsolete weaponry and a massive defense force, a senior party official explained to me.

WILL NORTH KOREA STRIKE GOLD?

For all the errors and mismanagement, there’s reason to be hopeful for the future. The North Koreans are very pragmatic people, coming from a long tradition of industrialism in its economic alliance with the Soviet Union. During the cold war, the DPRK even boasted a higher percentage of industrial workers than its former socialist ally, which is an important measure of “socialist progress.” That factor, combined with the population’s 99 percent literacy rate, can bring about a swift reconstruction of industry once economic reforms are carried out.

All over the countryside I saw that people were in some ways not living agrarian lives. Their skills were clear, for example, when they would weld with pinpoint precision, something only well-trained and experienced craftsmen do. More extraordinary was their ability to weld in the dark, despite not having undergone professional training. Factories were better organized and cleaner than those I’ve seen in other socialist countries in the past, such as those in Czechoslovakia and Hungary.

I was also impressed by the electrical and mechanical engineers who explained to me how they built a hydropower station, which included turbines and generators. The construction was based on one dam in a simple 1970s Russian leaflet with a few photos, but without detailed drawings and technical specifications. A team of ABB experts whom I led on a delegation were amazed at the ingenuity and called the station an engineering masterpiece.

The good work ethic comes from the party’s sophisticated governance system, which uses awards and high-level visits. One system, called the Ch’ŏngsan-ri management method, started in the 1960s. It was first introduced in the Chongsanri agricultural cooperation in 1960 before it was applied as an agricultural management system for collectivized farms. Essentially, the system was designed to give workers ideological and spiritual rather than material incentives. It urged officials to emulate Kim Il Sung by doing field inspections during which they addressed farmers’ grievances and listened to their ideas.

For factories, the Taean work system was introduced and aimed at streamlining bureaucratic management. This system was first introduced in 1961 at the Taean Electric Machinery Plant, which put a party committee at the head of an enterprise. The members were to debate and decide collectively the directions and methods to be applied in the company. As in the case of Chongsanri, the party committee had not only a supervisory role but also an inspirational one to permanently motivate workers to achieve production goals. Observers in the West may see an approach like this as paternalistic and backwards, but stripping it of all moral judgments, it gave North Koreans reason to work hard when times were difficult.

These socialist management systems were, with the exception of those of Mao’s China, the most radical ones. Even Stalin’s Soviet Union gave material benefits to high-performing workers. In addition to these methods, mass production campaigns like the Chollima movement that started in 1958 were introduced, which exhorted the workers to achieve production targets. To this effect it included “socialist competition” among industries, companies, farms, and work units, where the winners earned praise for their outstanding socialist and patriotic deeds.

The Korean Workers’ Party also has mass campaigns extolling workers to labor and to meet the planned targets. And last but not least, the top leaders regularly inspect factories, farms, shops, and military units, where they offer guidance and mix with exemplary workers, farmers, and soldiers. To memorialize such a historical visit, the local committee always erects a commemorative stone at factory entrances, schools, and other places that have what they would call the privilege of benefiting from the leader’s personal guidance.

The most exemplary workers are honored with the award of a “labor hero” title, while others get other awards and medals. State-run factories, companies, and army units are also given Kim Il Sung medals and Kim Jong Il medals “in the struggle to construct the state,” as the award reads. A small elite of senior party cadres, artists, sportsmen and sportswomen, and scientists who have done extraordinarily great deeds for the country are honored with golden watches carrying the leader’s signature, cars with the leader’s birthday number (216) on the license plate, and sometimes even houses. On a side note, material objects also, such as buildings, tractors, trucks, etc., are “rewarded” with stars and other symbols of recognition when their planned life span has been exceeded.

Everybody in the production line, from regular workers to chief engineers all the way up to senior ideological leaders, held a fervent belief in technology. They believed that it could solve pretty much every problem in their businesses. It’s a myth that has been cherished by all socialist countries—that science and technology can bring about an affluent socialist society—which also has influences in Confucianism. They constantly chattered using trendy acronyms like CNC (computer numerical control, meaning computer-controlled machine tools) and IT (information technology), and terms like “biotech,” implying some level of sophistication.

In 2009, I began hearing choirs sing a propaganda song praising the greatness of CNC machines. It was striking that the North Koreans, otherwise proud of conserving the purity of the Korean language, used even the English expressions CNC and CAD (computer-aided design) and not a Korean euphemism stripped of any foreign tinge. That was because everybody agreed, at least on the surface, that the DPRK did not require social and economic reforms. The fatherland was perfect, but the economy suffered because it didn’t have state-of-the art technologies. They blamed that problem on Western embargoes.

North Korea has the potential to experience a windfall of wealth from natural resources—but the problem is, unfortunately, that it’s not selling metals and minerals systematically. An important cause of this is the lack of electricity and materials, along with the worn-out equipment, antiquated facilities, and poor maintenance. This made even the country’s most important facilities operate at about 30 percent or less of their capacity only in the mid-2000s, according to the assessment of some mining equipment companies I represented in North Korea. The country has impressive deposits of more than 200 different minerals.

North Korea’s magnesite reserves are the world’s second largest after China’s, and magnesite is a particularly valuable mineral because of its importance for industry. It has a wide range of uses such as in insulating material in the electrical industry, as slag in steelmaking furnaces, and even in the preparation of chemicals and fertilizers.

The country’s iron ore mine in Musan, near the Chinese border, is Asia’s largest. Iron is the most commonly used metal, used for construction, including bridges and highways; means of transportation, such as cars, trains, ships, and aircraft; and tools such as machines and knives.

Its tungsten deposits are likely the sixth largest in the world, and North Korea is China’s second-largest coal supplier. While coal is primarily used for producing steam in electric power plants or by the steel industry for coke making, tungsten is used for mining and drilling tools, cutting tools, dies, bearings, and armor-piercing projectiles. In countries like the United States and Germany, tungsten is widely used in the production of cutting tools and wear-resistant materials.

North Korea is also home to substantial deposits of rare earth minerals, which are difficult to find around the globe but are increasingly in demand from growing powers such as China and India. They are particularly valuable because of their omnipotent potential: they’re present in pretty much every piece of consumer electronics, such as computer disc drives, X-ray imaging, flat-screen televisions, iPhones, wind turbines, halogen lights, and precision-guided missiles, to name but a few. The country is also home to an estimated 2,000 tons of gold, 500 billion tons of iron, and 6 billion tons of magnesite, with a total value running into the trillions of U.S. dollars. At least that’s according to a 2009 report titled Current Development Situation of Mineral Resources in North Korea by South Korea’s government-owned KORES Korea Resources Corporation.

North Korea feared losing control of its glamorously valuable natural resources, and as such was reluctant to sell raw materials to neighboring countries. As a result, only a few foreign and North Korean-invested mining joint ventures have been doing the extractions in the last ten years. When I suggested upon my arrival in North Korea to the senior officials in the then-Ministry of Metal and Machinery Industries, which owned the large Musan Iron Ore Mine at the Chinese border, to open it up to Chinese investment and exploitation, the answer was that “it is a part of the Korean heritage which we cannot give away.” Over the following years I witnessed the government turn down a dozen or so foreign requests to invest in mines.

But change is in the air, and North Korea is getting serious about profiting from metals and minerals. The China People’s Daily reported in September 2011:

According to China’s General Administration of Customs, the value of direct exports to China from the DPRK last year was $1.2 billion, a 51 percent increase year-on-year, attributed to China’s robust demand for iron ore, coal, and copper. At present, the DPRK mainly imports grain and oil from China. In 2010, China’s exports to its peninsula neighbor reached $2.3 billion, an increase of 21 percent from a year earlier.

The prospect was unthinkable just a couple of years earlier, but North Koreans are now rolling out the red carpet for Chinese investors. They’re also building manufacturing outposts along the border where China can hire cheap North Korean labor, where dealings are more relaxed than in Kaesong. (More on Kaesong later.)

China is making an effort, too, to develop its desolate northern provinces by taking advantage of cross-border exchanges. These provinces are now booming with factories along with a construction frenzy to build roads and railways that move outside of North Korea, but China supports the construction and maintenance of some roads into North Korea as well.

Some unlikely spots are being developed for joint manufacturing projects. Hwanggumpyong, a farming and military-focused island south of the Chinese border city of Dandong, and Wihwa, a smaller island in the middle of the Yalu River, are due to be turned into hubs for manufacturing, tourism, and logistics. So far, disagreements between the North Koreans and the Chinese have led to delays.

Russia, too, has moved in with construction projects that will give it access to the ice-free North Korean port of Rajin. Moscow’s hope is to export Siberian coal and import Asian goods that it will eventually transport to Western Europe. (Russian Railways operates the world’s second-largest network after that of the U.S., reaching from North Korea’s border well into Western Europe.) Of course, North Korea stands to get significant cuts from the project.

Many South Koreans fear that China is encroaching on North Korea with money, hoping to swallow it up and turn it into a de facto Chinese province. The accusations are unfounded; I just don’t see convincing evidence that the investments—made by individual companies and not the government itself—are part of a political conspiracy driven by common defense interests or a grand geopolitical strategy on the Korean Peninsula.

Trade and investment are bigger priorities for China. That will improve the standard of living of its northeastern provinces, as well as promote stability in its immediate neighborhood. Too much pessimism can block out this sort of objective view, and there’s much to look forward to in China-North Korea relations.

NOTES

1. Data from http://www.country-studies.com/north-korea/agriculture.html.

2. Data from U.N. agencies and The World Factbook 2013-14. Washington, DC: Central Intelligence Agency, 2013.