North Korea Development Report 2002/03

Development Report 2002/03 Report Development Korea North North Korea Development Report 2002/03 Edited by Choong Yong Ahn Choong Yong Ahn Edited by North Korea Development Report 2002/03 Edited by Choong Yong Ahn Choong Yong Ahn is the president of the Korea Institute for International Economic Policy. He received his Ph.D. from Ohio State University. He was a professor in the Department of Economics at Chung-Ang University in Seoul. Dr. Ahn is current- ly serving as the Chair of the APEC Economic Committee and as a member of the Presidential Economic Advisory Council in Korea. He has written extensively on issues related to East Asian development and economic cooperation in the Asia-Pacific region. His recent publications include “A Search for Robust East K Asian Development Models After the Financial Crisis: Mutual Y Learning form East Asian Experiences” (Journal of Asian M Economics, 2001) and “Financial and Cooperate Sector C Restructuring in South Korea: Accomplishments and Unfinished Agenda” (Japanese Economic Review, 2001). He was bestowed with the Okita Research Award from the National Institute for Research Advancement in Japan on the book, Gendai Higashi Asia Geizairon (Modern East Asia Economy), published by Iwanami Shoten in 2000. 300-4 Yomgok-dong, Seocho-gu, Seoul 137-747 Korea Tel. (822) 3460-1114 Fax. (822) 3460-1144 URL: http://www.kiep.go.kr Price USD 20 The Korea Institute for International Economic Policy (KIEP) was founded in 1990 as a government-funded economic research institute. It is the world’s leading institute on the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues, and also serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research for foreign institutes and governments on all areas of the Korean and international economies. KIEP has highly knowledgeable economic research staff in Korea. Now numbering over 100, our staff includes 37 research fellows with Ph.D.s in economics from international graduate programs, supported by more than 40 researchers. Our staff’s efforts are augmented by our affiliates, the Korea Economic Institute of America (KEI) in Washington, D.C. and the KIEP Beijing office, which provide crucial and timely information on the local economies. KIEP has been designated by the government as the Northeast Asia Research and Information Center, the National APEC Study Center and the secretariat for the Korea National Committee for the Pacific Economic Cooperation Council (KOPEC). KIEP also maintains a wide network of prominent local and international economists and business people who contribute their expertise on individual projects. KIEP continually strives to increase its coverage and grasp of world economic events. Expanding cooperative relations has been an important part of these efforts. In addition to many ongoing joint projects, KIEP is also aiming to be a part of a broad and close network of the world’s leading research institutes. Considering the rapidly changing economic landscape of Asia that is leading to a further integration of the world’s economies, we are confident KIEP’s win-win proposal of greater cooperation and sharing of resources and facilities will increasingly become standard practice in the field of economic research. Choong Yong Ahn President 300-4 Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea Tel: 02)3460-1114 / FAX: 02)3460-1144,1199 URL: http//www.kiep.go.kr Price USD 20 North Korea Development Report 2002/03 Edited by Choong Yong Ahn KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP) 300-4 Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea Tel: (822) 3460-1144 Fax: (822) 3460-1144 URL: http://www.kiep.go.kr Choong Yong Ahn, President Published August 22, 2003 in Korea by KIEP ⓒ 2003 KIEP ISBN 89-322-0035-1 Preface North Korea has been in political and economic straits since the collapse of the socialist bloc in the early 1990s. Several problems remain as obstacles to the recovery of the North Korean economy, including a continued deterioration in overall production, economic inefficiency, difficultly in foreign relations, and political and mili- tary frictions with the outside world. Therefore, North Korea’s economic development should be made on the basis of the reform and opening of the economic system and the building of peace on the Korean peninsula through improved relations with neighboring countries. This process will contribute to the building of a peaceful structure on the Korean peninsula and international stability as well as having a positive influence on North Korea itself. Since the mid-1990s, South Korea and the international community have continued to support North Korea during severe economic difficulty by providing humani- tarian aid to alleviate food shortages. However, international assistance to North Korea has not been accompanied by internal economic reform, and food shortages were only assuaged in the short run. Looking at these circumstances, the reform and opening of North Korea could be the most fundamental condition for economic recovery and the expansion of international assistance. North Korea, however, has showed some signs of change in its economic management since 2002. Its major innovative policies can be summarized as a partial introduction of free market prices and revison of the distribution system, the revalua- tion of a foreign exchange rate, the expansion of managerial autonomy in the corpo- rate sector and the strengthening of the incentive system. This new economic policy has been seen to be more comprehensive than the partial reforms of the economic management system made in the past. However, due to North Korea’s insulation from the outside world, the international community knows little about the North Korean economy or how it is managed. Therefore, the most fundamental task in incorporating North Korea into the international society will be to understand the workings of North Korea, espe- cially its economic system. Recently, the changes in North Korea’s economic system have attracted outside interest, but there is much confusion as to the characteristics of the changes and their future direction due to the lack of comprehensive data. This is principally because North Korea operates independently from the global econom- 4 | North Korea Development Report 2002/03 ic system and therefore does not share information with other economies. Consequently, this lack of information has limited the research on the North Korean economy greatly and efforts to systematically collate the research that has been com- pleted has been lacking. Accordingly, policy makers, researchers and students expe- rience confusion and difficulty when attempting to understand North Korea. To enhance the understanding of readers in Korea and abroad, KIEP is releasing both English and Korean versions of the “North Korea Development Report.” This report was enabled through a research collaboration agreement between the Korea Institute for International Economic Policy and the JWK International Corporation, a private consulting firm in the United States. KIEP conducts research on North Korean economy in terms of a regional multi- lateral equation as related with the United States, Japan, China and Russia. This report has analyzed the North Korean economy in terms of international political economic relations, including the North Korean economic system, organization and the status of various industries. Furthermore, North Korea’s macroeconomic policy, financial policy and institutions, cost management, logistics system, state enterprise management, science and technology policy, social welfare system and defence industry are included in this report. It also deals with the development of inter- Korean economic cooperation and the international community’s role in North Korean economic development. We believe this report provide good reference material for policy makers, researchers, students and those who have interest in North Korean affairs. We thank the authors who have actively participated in this report and the experts on North Korean economy who have given valuable advice on format. We also thank the JWK International Corporation for providing financial assistance and helping us to initiate this report. KIEP will endeavor to provide understanding and systematic assessment on North Korea by analyzing changes in the North Korean economy and by publishing the “North Korea Development Report” annually to continue diversified and in- depth studies from international perspectives. We hope that the “North Korea Development Report” will contribute to enhancing the quality of research on North Korea, making it available to the international community. August 2003 Korea Institute for International Economic policy President Choong Yong Ahn Contents Preface 3 Contributors 15 Part I. Introduction I. Overview 21 II. Current Status of the North Korean Economy 32 1. Macroeconomic Status 32 2. North Korean Economic Trends by Sector 46 Part II. Industrial Development and Problems III. Social Overhead Capital 55 1. Current Status of North Korea’s SOC 55 2. Problems in North Korea’s SOC 80 IV. The Agricultural Sector 83 1. Characteristics of North Korea’s Agricultural Structure 83 2. Grain Production in North Korea 86 3. The Agricultural Management System and Production Structure 93 4. The Market System for Agricultural Products and the Distribution System 95 V. Industrial Structure and Production 102 1. Characteristics of North Korea’s Industrial Structure 102 2. Production in Major Industrial Sectors 111 3. The Industrial Management System 126 VI. The Defense Industry 133 1. Characteristics of North Korea’s Defense Industry 133 2. North Korea’s Defense Industry and Its Development Process 139 3. Problems in North Korea’s Defense Industry 158 6 | North Korea Development Report 2002/03 VII. The Energy Sector and Energy Policy 164 1. North Korea’s Energy Policy: Self-Reliance and Developing Alternative Energy Sources 164 2. Energy Supply and Demand 165 3. North Korea’s Energy Policy Problems 168 4. North Korea’s Energy Sector Reform and Future Tasks 171 5.

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