North Korea Development Report 2003/04 Price USD 12 the North Korea the North Korea Korea Korea in Both Korean and English

Development Report 2003/04 North North Korea Development Report 2003/04 Korea North Korea Development Report As a result of North Korea’s isolation from the outside world, international communities know little about the status of the North Korean economy and its management mechanisms. Although Recently, a few recent changes in North Korea’s economic system have attracted international interests, but there is much confusion remains as to the characteristics of North Korea’s recent policy changes and its future direction due to the lack of information. Therefore, in order to increase the 2003/04 understanding of readers in South Korea and abroad, KIEP is releasing The North Korea Development Report in both Korean and English. The motivation behind this report stemmed from the need for a comprehensive and systematic investigation into North Korea’s socio-economic conditions, while presenting the current status of its industrial K sectors and inter-Korean economic cooperation. The publishing of this second volume K Y is important because it not only supplements the findings of the first edition, but also Y M updates the recent changes in the North Korean economy. The topics in this report M C include macroeconomics and finance, industry and infrastructure, foreign economic C relations and inter-Korean economic cooperation, social welfare and science & technology. This report also covers the ‘July 1 Economic Reform’ launched two years ago and subsequent changes in the economic management system. The North Korea Development Report helps to improve the understanding of the contemporary North Korean economy. 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 12 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 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 K K Y individual projects. Y M M C KIEP continually strives to increase its coverage and grasp of world economic events. C 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 12 Preface The North Korea Development Report was launched as an annual report in 2002 in recognition of the need for a comprehensive overview of the North Korean economy and policies. The publishing of this second edition is important because it not only supplements the findings of the first edition, but also updates the present condition of the North Korean economy and reflects the recent changes in its economic policies. Like the inaugural volume, Korean authors have contributed to this Report to reflect exclusively Korean experts views. The topics covered in this report are as follows: macroeconomics and finance (Part I), industry and infrastructure (Part II), foreign economic relations and inter-Korean economic cooperation (Part III), social welfare and science & technology (Part IV), and the recent economic reforms (Part V). Parts I through IV correspond to the organization of the first edition of the report, while Part V is a new section that covers the “July 1 Economic Reforms” launched two years ago and subsequent economic policy changes. This second edition moves a step beyond the economic and policy focus of the first edition by attempting to ad- dress the most pressing questions concerning the North Korean economy. As is widely known, North Korea announced the so-called July 1 Economic Reform and later designated Sinuiju, Kaesong, and Mt. Kumkang as special economic zones. Despite these recent attempts to revitalize its economy through economic policy changes, however, it has failed to attract active economic assistance and investment from the international community because of the North Korean nuclear standoff and subsequent regional uncertainty. As a consequence, the initial expectations of the North Korean government with regard to the economic reforms and to the partial opening of the economy to foreigners have not been met. North Korea’s economic growth rate for 2003 is estimated at 1.8 percent, slightly higher than the previous year’s 1.2 percent; the positive growth rate over the past five years since 1999 offers some basis for optimism. Nevertheless, it cannot be said that the country’s economy is on the road to recovery, as this 4 | North Korea Development Report 2003/04 anemic growth rate is far too weak to overcome the near collapse of the economy during the 1990s. If we examine the trends in each industrial sector, we can see that the manufacturing sector is still experiencing considerable hardship due to the shortages in energy and raw materials that have continued in parallel with little progress in North Korean nuclear issues. On the other hand, slight improvements in electric production, helped by factors such as the construction of small-scale electrical power facilities and some increases in coal production, have enabled slight increases in manufacturing production. In other areas, the July 1 Reform has greatly stimulated the commercial and distribution sectors thanks to the enormous growth in the range of private commercial activities, including increases in street ven- dors and stores and the systematization of service industries and brokerage businesses. In agriculture, total grain production in 2003 reached an estimated 4.25 million tons, an increase over the previous year attributable to good weather and 300,000 tons of fertilizer assistance from South Korea. This increase, however, was far less than the domestic demand, so that appeals for food assistance from the international community were unavoidable. The construction industry saw the largest growth among industrial sectors, thanks to favorable factors such as a large surplus labor pool and the rehabilitation of urban living facilities financed through sales of People’s Bonds. Despite the overall deterioration in foreign relations caused by the nuclear problems, North Korea’s trade with its major trading partners such as China continues to grow. Trade grew 5.8 percent in 2003 to $2.39 billion; exports rose 5.5 percent to $777 million while imports increased 5.9 percent to $1.61 billion. Trade with China in particular is growing significantly, and now comprises al- most 50 percent of North Korea’s entire foreign trade. This increasing dependence on China is partly the result of the international economic sanctions. The likelihood that this dependence will have a negative impact on future expansion of inter-Korean economic cooperation cannot be ignored. Although the external environment has worsened over the nuclear question, inter-Korean cooperation and investment have steadily grown. North-South economic exchanges have led to substantial results, including new legislation and systems related to inter-Korean economic cooperation as well as the three major cooperative projects (Mt. Kumkang tourist projects, the reconnection of railroad and highway links, and the construction of the Kaesong industrial complex). Although trade between the two Koreas has continued to rise, reaching $700 million annually for the first time in 2003 and maintaining that pace in the first half of 2004, the recent chill in North-South relations has interrupted this trend. As of August 2004, although a total of 46 investment projects have been ap- Preface | 5 proved by the South Korean government, the pace of bilateral interchanges has slowed compared to the past. Nevertheless, the situation is slowly turning around thanks to the construction of the Kaesong industrial complex. Given that the strained relationship between North Korea and the United States over the nuclear issue and the uncertainties surrounding the Korean peninsula are the fundamen- tal obstacles blocking further expansion of inter-Korean cooperation, a rapid and peaceful settlement of the nuclear issue is of urgent concern. Meanwhile, North Korea is making efforts to change the management and operational framework of its economic system through measures such as the July 1 Reform and follow-up policy changes. The policy measures launched after the July 1 Reform are unprecedented, active policy changes. The government itself has commented that they are “as epochal as the land reforms of 1946.” The recent reforms will not only have major impacts on North Korean consumers, economic activities, and production management systems, but are also expected to lead to significant changes in future developmental planning.

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