The two Koreas, The Republic of Korea (South Korea, ROK) and the Democratic People’s Republic of Korea (North Korea, DPRK) came into being in 1948. It was after the Soviet Army and its proxies set up a communist regime in the area north of the 38th parallel, and to the south of that line, a military government (directly supported by the United States) took control, the Korean Peninsula was divided. The ultimate objective of both, the Soviet Union and the US, was to ultimately leave the Korean Peninsula, and let the Koreans figure it out, but the commencement of Cold War left the proxies in the peninsula for over seven decades, even in the post- Cold War era.
De-colonisation from the Japanese and political division after the Second World War ensued political chaos and disruption of trade within Korea. Along with providing economic aid, the US military government in the south decided to privatize properties previously owned and controlled by the Japanese government and civilians. Then the Korean War broke out in 1950, killing one and half million people and destroying about a quarter of capital stock during its three-year duration. Post-war, policymakers of the ROK aimed at achieving economic growth by promoting indigenous industrial firms, similar to many other nations. In the 1950s and 1960s, the South Korean economy was more of a protectionist economy. It was defined by the tariff barriers and imposition of prohibition on imports of manufacturing products. After the military coup led by General Park Chung Hee, the government shifted its focus to a strategy of stimulating growth through export promotion, mainly by providing low-interest loans to exporting firms according to their performance. After the US withdrawal from Vietnam and General Park Chung Hee’s assassination, the rise in security concerns demanded liberalization. In the quarter century following the policy shift in the early 1960s, the South Korean per capita output grew at an unusually rapid rate of 7 percent per year.
Facing the aftermath of the Korean War (1950-53) and World War II, both the Koreas started as poor nations. Today, even with massive defense expenditure, South Korea has the same wealth as Western European nations, while North Korea remains at the bottom of the world’s development ladder. Especially over the past 30 years, the two economies have diverged sharply – economically, politically and culturally. South Korea rapidly industrialized, growing at one of the fastest rates in the world, while the North still remains stagnated. Pyongyang adopted three guiding policies: “a self-sufficient national economy”, “heavy-industry-first development” and “military-economy parallel development”.
North Korea’s initial phase of economic development was dominated by industrialization, however, soon the country adopted the ideology of juche (self-reliance) and emphasized on heavy industry development. For the same, the then regime borrowed loans and imported machinery and plant facilities on a large-scale. Inability to manage huge debt, and the oil crisis led to the problem of trade deficit and weakened the country’s repayment capability. Adding to the problem, rigid approach and highly centralized planning drifted the region towards stagnation.
The regime for the past few decades has given the highest resources priority to military spending. Under Kim Il Sung, the state assumed tight control over the economy, collectivized agricultural land and effectively asserted ownership over all private property. State-controlled media and restrictions on all travel into or out of the country helped preserve the veil of secrecy around North Korea’s political and economic operations and maintain its isolation from most of the international community.
After Kim Jong II died in December 2011, the job of supreme leader went to Kim Jong Un, who continued to work on the nuclear arsenal. Until recently, under Kim Jong Un, North Korea has given unusual high priority to the nuclear and missile program under the byungjin policy, adopted in 2016. North Korea, with 1.2 million active duty military and 7.7 million reserves, has one of the world’s largest ground forces and is aggressively developing nuclear weapons and missiles. Heavy investment in the nuclear program gives North Korea leverage while asking for aid, which is essentially why DPRK, as a rogue state has been able to survive. It was only after the series of nuclear attack threats, which would have been possibly dealt with fire and fury, South Korean President Moon Jae-in took the initiative, and played a key role in keeping alive the contacts with North Korea after Trump abruptly canceled the summit late last month.
Under Kim Jong-Un, there has been a reasonable development of private markets in the country. Market activities now constitute about 30% of the North Korean GDP, coming from 450 officially licensed markets and 750 unlicensed markets. Adoption of a new five-year economic development strategy and the growth of markets has changed the terms on which South Korea shapes its future engagement strategy. The new North Korean Special Enterprise Zones (SEZs) have brought change in the North Korean markets with the introduction of the right to set salaries, pay workers directly, opportunities to form joint ventures, access to financial and other services for investors, and legal protections against various risks.
The world saw the Trump-Kim Jong Un historic summit, but if the meeting has been successful in denuclearization or not, still remains unclear. The central debate is about engagement, which is a larger subset of economic interdependence. The mechanism to engage North Korea in international trade hardly took the empirical data pertaining to the current nature of North Korea’s external economic relations into consideration. The reasons for this are understandable; even international trade statistics are regarded by the North Korean regime as a state secret. In the absence of an overall picture of North Korea’s international trade, investment, and aid ties, it is difficult if not impossible to have a meaningful debate on the crucial political economy issues that underlie recent policy debates.
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