Korea under the Japanese Occupation

North Korea inherited the basic infrastructure of a modern economy because of Japan's substantial investment in development during the Japanese occupation. The Japanese had developed considerable heavy industry, particularly in the metal and chemical industries, hydroelectric power, and mining in the northern half of Korea, where they introduced modern mining methods. The southern half of the country produced most of the rice and a majority of textiles. The hydroelectric power and chemical plants were said to be second to none in Asia at that time in terms of both their scale and technology. The same applied to the railroad and communication networks.

There were, however, serious defects in the industrial structures and their location. The Korean economy, geared primarily to benefit the Japanese homeland, was made dependent on Japan for final processing of products; heavy industry was limited to the production of mainly raw materials, semifinished goods, and war supplies, which were then shipped to Japan proper for final processing and consumption. Japan did not allow Korea to develop a machine tool industry. Most industrial centers were strategically located on the eastern or western coasts near ports so as to connect them efficiently with Japan. Railroad networks ran mainly along the north-south axis, facilitating Japan's access to the Asian mainland. Because the Japanese occupied almost all the key government positions and owned and controlled the industrial and financial enterprises, few Koreans benefited from acquiring basic skills essential for modernization. Moreover, the Japanese left behind an agrarian structure--land tenure system, size of landholdings and farm operation, pattern of land use and farm income--that needed much reform. Farms were fragmented and small, and landownership was extremely unequal. Toward the end of the Japanese occupation, about 50 percent of all farm households in Korea were headed by tenant farmers.

The sudden withdrawal of the Japanese and the subsequent partition of the country created economic chaos. Severance of the complementary "agricultural" south from the "industrial" north and from Japan meant that North Korea's traditional markets for raw materials and semifinished goods--as well as its sources of food and manufactured goods--were cut off. Furthermore, the withdrawal of the entrepreneurial and engineering skills supplied mainly by Japanese personnel affected the economic base. Thus the task facing the communist regime in North Korea was to develop a viable economy, which it reoriented mainly toward other communist countries, while at the same time to rectify the "malformation" in the colonial industrial structure. Subsequently, the problem was compounded further by the devastation of industrial plants during the Korean War (1950-53). North Korea's economic development therefore did not tread a new path until after the Korean War.

Developmental Strategy

As of mid-1993, North Korea's economy remained one of the world's most highly centralized and planned, even by pre-1990 communist standards. Complete "socialization" of the economy was accomplished by 1958, when private ownership of the means of production, land, and commercial enterprises was replaced by state or cooperative (collective) ownership and control. As a result, industrial firms were either state-owned or cooperatives, the former contributing more than 90 percent of total industrial output in the 1960s.

Unlike in industry, collectives are the predominant form of ownership and production in agriculture; the remaining rural enterprises are organized as state farms. The sole negligible exception to state and collective ownership in agriculture is the ownership of small garden plots and fruit trees, as well as the raising of poultry, pigs, bees, and the like, which are permitted both for personal consumption and sale at the peasant market. Private plots can be no more than roughly 160 square meters in area. State and cooperative ownership and control extends to foreign trade, as well as to all other sectors of the economy, including banking, transportation, and communications.

In commerce nearly all goods are distributed through either state-operated or cooperative stores. Less than 1 percent of retail transactions are carried out at peasant markets, where surplus farm products are sold at free-market prices.

As in other Soviet-type or "command" economies, all economic decisions concerning the selection of output, output targets, allocation of inputs, prices, distribution of national income, investment, and economic development are implemented through the economic plan devised at the center and are "blueprinted" by the State Planning Committee. In the face of the worldwide political and economic collapse of communist regimes in the early 1990s, North Korea defiantly continues to sing the praises of a command economy. Attempts to increase production through rigid central control and exhortations and other non-pecuniary incentives have not ceased, as exemplified by the campaign entitled "Speed of the 1990s." On-site industrial visits by President Kim Il Sung and his son and heir-apparent, Kim Jong Il, continue.

However, there have been some minor efforts toward relaxing central control of the economy in the 1980s that involve industrial enterprises. Encouraged by Kim Jong Il's call to strengthen the implementation of the independent accounting system (tongnip ch'aesangje) of enterprises in March 1984, interest in enterprise management and the independent accounting system has increased, as evidenced by increasing coverage of the topic in various North Korean journals. Under the system, factory managers still are assigned output targets but are given more discretion in making decisions about labor, equipment, materials, and funds.

In addition to fixed capital, each enterprise is allocated a minimum of working capital from the state through the Central Bank and is required to meet various operating expenses with the proceeds from sales of its output. Up to 50 percent of the "profit" is taxed, the remaining half being kept by the enterprise for purchase of equipment, introduction of new technology, welfare benefits, and bonuses. As such, the system provides some built-in incentives and some degree of micro-level autonomy, unlike the budget allocation system, under which any surplus is turned over to the government in its entirety.

Another innovation, the August Third People's Consumer Goods Production Movement, is centered on consumer goods production. This measure was so named after Kim Jong Il made an inspection tour of an exhibition of light industrial products held in P'yongyang on August 3, 1984. The movement charges workers to use locally available resources and production facilities to produce needed consumer goods. On the surface, the movement does not appear to differ much from the local industry programs in existence since the 1960s, although some degree of local autonomy is allowed. However, a major departure places output, pricing, and purchases outside central planning. In addition, direct sales stores have been established to distribute goods produced under the movement directly to consumers. The movement is characterized as a third sector in the production of consumer goods, alongside centrally controlled light industry and locally controlled traditional light industry. Moreover, there were some reports in the mid-1980s of increasing encouragement of small-scale private handicrafts and farm markets. As of 1992, however, no move was reported to expand the size of private garden plots.

All these measures appear to be minor stop-gap measures to alleviate severe shortages of consumer goods by infusing some degree of incentives. In mid-1993 no significant moves signaling a fundamental deviation from the existing system had occurred. The reluctance to initiate reform appears to be largely political. It is, perhaps, the linkage between economic reform and political liberalization that worries the leadership. This concern is based on the belief that economic reform will produce new interests that will demand political expression, and that demands for the institutionalization of such pluralism eventually will lead to political liberalization. There clearly exists a catch-22 situation for Kim Il Sung and, particularly, for Kim Jong Il. In order to legitimize his power base, the younger Kim needs an economic base. However, his economic reforms challenge his position as the advancer of chuch'e and may eventually undo the regime.

In the mid-1980s, the speculation that North Korea would emulate China in establishing Chinese-style special economic zones was flatly denied by then deputy chairman of the Economic Policy Commission Yun Ki-pok (Yun became chairman as of June 1989). China's special economic zones typically are coastal areas established to promote economic development and the introduction of advanced technology through foreign investment. Investors are offered preferential tax terms and facilities. The zones, which allow greater reliance on market forces, have more decisionmaking power in economic activities than do provincial-level units. Over the years, China has tried to convince the North Korean leadership of the advantages of these zones by giving tours of the various zones and explaining their values to visiting high-level officials.

In December 1991, North Korea established a "zone of free economy and trade" to include the northeastern port cities of Unggi, Ch'ngjin, and Najin. The establishment of this zone also had ramifications on the questions of how far North Korea would go in opening its economy to the West and to South Korea, the future of the development scheme for the Tumen River area, and, more important, how much North Korea would reform its economic system.

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Source: U.S. Library of Congress