Julie Chao > North Korea

Collapsed Economy

Reform is Slow While Poverty Prevails

April 24, 2003

PYONGYANG, North Korea -- This capital of 2 million people seems normal at first glance. Roads are wide and clean. Traffic is orderly. People appear well-dressed and well-fed.

But stay awhile and it becomes clear that things are not what they seem. For one thing, there's hardly any traffic. That's because the country has almost no fuel. When night falls, streets are dark and apartment buildings remain largely unlit. Shacks in front of the train station sell snacks by candlelight.

Replacement parts for just about anything are hard to come by. Most factories have shut down, and few smokestacks emit smoke. Roads are built by hand, not machinery. Train tracks are so old that the 100-mile trip from Sinuiju at the Chinese border to Pyongyang takes six hours because going any faster would be dangerous.

Then there are the people: they're short, much shorter than in any other Asian country. After two years of a severe famine in the mid-1990s followed by years of scarcity, the effects of chronic undernourishment are obvious.

"In Korea, everything is lacking," a North Korean tour guide told some foreign visitors.

It's a wonder this country can do something as advanced as enrich uranium for nuclear weapons. Yet that is exactly what North Korea acknowledged doing last October, according to U.S. officials, an admission that set off a high-stakes standoff between Washington and Pyongyang.

Until the impasse is broken, 22 million North Koreans are stuck with an economy that has essentially collapsed. Its foreign trade volume in 2001 was estimated to be $2.3 billion, less than 1 percent of neighboring South Korea's, and exports are only one-third of what they were after the breakup of the Soviet Union, its chief benefactor in the past. China has since assumed that role.

About 70 percent of its domestic economy is illegal, said Dong Yong-seung, head of the North Korea research team at the Samsung Economic Research Institute in Seoul.

"If the American or South Korean economy were in the same situation, it would already be considered collapsed," Dong said.

Dictator Kim Jong-il wants a security pact with the United States, believing that is the only way to guarantee his political survival, but ultimately, he sees better relations with the world's powers as the only way to ensure his country's economic survival.

Getting off the State Department's list of states that sponsor terrorism would qualify it to apply for low-interest loans from the World Bank and the Asian Development Bank. Normalizing ties with Japan could result in a grant and loan package of up to $10 billion. Political stability may draw much-needed foreign investors, particularly those from South Korea.

It would also allow the regime to shift spending away from its military, which has been the top priority for a country that seems to be in a perpetual state of preparing for war.

"As North Korea prepares for possible war, they're especially reserving food for the army," said Dong. "So the situation for civilians is very serious."

Until the nuclear crisis erupted last fall, North Korea's reclusive leader had taken a number of steps towards opening up the economy and ending years of isolation. The country set up a new economic zone on the Chinese border, passed laws to attract foreign investment and went on a diplomatic spree, establishing relations with a handful of Western countries, including Australia and Canada.

The hard-line government, which has for years trumpeted its own brand of communism, called "juche," or self-reliance, began tacitly sanctioning the previously-denounced capitalist concept of profits.

South Korea's Hyundai Asan Corp., which opened a mountain tourist resort in North Korea four years ago, tried for years to persuade the government to also open a restaurant with local staff. But until this year, the regime refused, fearing their citizens would come into direct contact with foreigners. Now, they've learned they can charge $25 for a mediocre meal -- and tourists will pay.

"At first, they worried about the political influence on their people," said a Hyundai official who asked not to be identified. "Now they think about earning money."

A European aid worker who lives in Pyongyang said about 50 restaurants have opened in the city, many of them run by Koreans from Japan who have stayed loyal to North Korea.

Last summer, the government also tried to regain control over the economy and reduce the runaway black markets, where North Koreans do most of their shopping. The regime consolidated several types of currency, each with varying levels of privilege, and revalued it at a level closer to reality. It eliminated ration coupons, raised wages and raised prices even more. The cost of a subway ticket jumped 2,000 percent.

Although North Korea's leaders succeeded in reducing the illegal economy for awhile, the black markets have come back. Yet they are strictly off-limits to outsiders.

"We know where they are, but officially they don't exist," said the aid worker, who asked not to be identified. "If I got caught at one I'd probably be expelled."

Inflation has soared and because of the nuclear proliferation crisis, the reforms did not lead to the anticipated rush of foreign investors.

There hasn't been much investment of any kind since the collapse of the Soviet bloc. Pyongyang appears to be a city frozen in time. The skyline is dominated by the shell of a giant pyramid-shaped hotel. Intended to be the tallest in Asia, it has been half-finished since the early 1990s, when the government ran out of money.

"This is a new road," a tour guide told some visitors. Asked when it was built, he answered: "1993."

Besides tourism and remittances from loyalists in Japan, North Korea is believed to earn a large portion of its foreign exchange through missile sales, drug smuggling and counterfeiting.

It is difficult to fathom that North Korea was actually better off than South Korea for many years. After the country was divided half a century ago, the north got most of the heavy industry and power infrastructure while the south got more of the agriculture and light industry.

The North Korean countryside doesn't look like it has changed much since. Dirt is moved by people using shovels and wheelbarrows. Cows are few and tractors fewer. Trains and trucks are crammed with passengers.

Even in the capital, transportation is scarce. It is not unusual to see people walking down the street with furniture strapped to their backs or tied to their heads.

Some analysts believe North Korea hopes to eventually emulate the Chinese model, opening up the economy while keeping a tight political grip, but Dong, who meets regularly with North Korean officials, believes Pyongyang wants to take its own path.

"They're changing, but very slowly," said Dong. "They want to be part of the international community, but they're afraid of being changed by the outside."