Chinese leaders like to remind their North Korean colleagues of this history. That’s because Beijing hopes to put North Korea on a Chinese growth model. At diplomatic meetings, they explain to North Koreans that the socialist countries in Eastern Europe collapsed because of their reluctance to reform, whereas Vietnam and China undertook pragmatic even if unpopular changes. The official line is that the reforms led them on a path to development, prosperity, and strength. In the eyes of the Vietnamese and Chinese neighbors, socialist countries like North Korea and Cuba needed to make up their minds quickly.
One analysis by Bank of America-Merrill Lynch, published in early 2012, argues that serious economic reforms would most likely trigger an annual growth rate of 10 to 12 percent—a remarkably high average that exceeds the roughly annual growth of 5 to 8 percent in China and Vietnam. The firm further noted that liberalization would close the income gap between “rich” South Korea and “poor” North Korea. In forty years North Korea may be just over three times poorer than its southern neighbor, compared to forty times poorer if no changes are enacted soon. The report added that the DPRK can achieve this goal if it follows the steps of other emerging economies that decided to join the global economy. It also said that market opening does not necessarily lead to reunification, as the North may opt for a partial open market system like China.
Western advice to the North Koreans is suspected as a sugar-coated plot to overthrow the socialist system, in particular during periods when tensions with the U.S. and South Korea are high. Still, in my own private discussions with senior cadres, they admitted the need to “learn from other countries and adopt elements from them that are beneficial for our country.”
Lately, reform-minded cadres have been getting a new boost from “Kim Jong Un, who has an interest in the knowledge economy and is carefully watching economic reforms in various countries, including China,” said Yang Hyong Sop, vice chairman of the Supreme People’s Assembly, to the Associated Press in a rare interview on January 16, 2012.
North Korea’s official economy began a modest recovery in the 2000s, but annual average growth was meager at 1.5 percent per year during the 2000s. As in countless other poor countries, the informal or “shadow” economy without a doubt grew multifold during the same period. In the absence of reliable statistics, the figures I’ve compiled from different sources, combined with my on-the-ground observations, are merely approximations and not precise data.
But being in the field, I’ve captured a general idea of economic trends that the statistics don’t fully reveal because the government doesn’t publish them. There are emerging bicycle repair spots across the country and more people selling cigarettes, drinks, food, and other goods along streets outside the capital.
But number-crunching didn’t encapsulate the breadth of what was going on. In February 2012, for instance, the South Korean Hyundai Research Institute reported that North Korea’s GDP grew the previous year by a surprising 4.7 percent from a year earlier. But take the figure with a grain of salt. It was based on the think tank’s calculations of grain production, which according to the U.N. Food and Agriculture Organization2 grew by 7.2 percent from the previous year. Combine that, the organization argued, with a lower infant mortality rate—a combination of trends that, from an economist’s standpoint, signify growing per capita income and prosperity. The country’s heightened efforts to meet its goal of building “a strong and prosperous nation by 2012” was another cause for this growth rate, although it will be unsustainable without future economic reforms. There were other chance factors, like a good harvest that year and the efforts made in preparation for Kim Il Sung’s birthday.
There appears to be no end in sight for the severe economic problems of the world’s most centrally planned economy. Chronic under-investment from both foreign investors and the government led to an industrial capital stock that was run down to a critical level. Over the past two decades, countless factories have closed; those that continue to run often do so at low-level capacities, thanks to a shortage of raw materials. (North Korea is relatively resource-rich, but the country needs heavy investment to exploit the metals and minerals, as well as foreign equipment and spare parts.) Add that to chronic electricity shortages, and economic prospects get even worse; the lack of electrical power is the largest bottleneck to any industrial development of North Korea. I have visited provincial factories far from the capital where workers slept in the factory at night so they could wait for sudden electrical bursts. When the power came back and the lights went on, the workers jumped to their feet to operate the machines for a couple of hours until the next blackout. They’d sometimes go without electricity for the remainder of the day.
Historically, North Korea had difficulties propping up its industrial economy without sufficient electricity, but the situation was always better before the cold war ended. Thanks to flooding, hydro-power generation dramatically dropped until the mid-1990s. In addition, the coal supply declined and wasn’t enough to feed thermal power plants, because of the end of Soviet subsidies and because many coal mines were flooded in the 1990s.
In the late 1980s, North Korea generated its peak electricity output, estimated at 30 terrawatt-hours. (1 terrawatt-hour is 1 billion kilowatt-hours, the equivalent of the amount of energy that is produced by a 1 million megawatt generator over a period of 1 hour.)
Surprisingly, the World Resources Institute estimated in 2010 that North Korea’s electricity consumption per capita was 600 to 800 kilowatt-hours per year, compared to 402 in India and merely 74 in Myanmar. The estimates seemed impressive, but flawed. They may be based on nominal electricity generation and distribution capacities, versus a much lower actual electricity production and distribution. About two thirds of the power came from dams built mostly under Japanese rule, and the remainder from coal plants—two sources that add up to a decent output, but not enough for the entire country.
In the 1990s, the total power production dropped below 20 terrawatt-hours, according to most estimates. ABB, a firm I represented that worked on power technologies, suggested that the loss of power during transformation and distribution amounted to up to 25 percent. We recommended that the Ministry of Energy Production and Coal Industry allocate more resources for fixing up the country’s electrical infrastructure. The approach would have been far more cost-effective than adding new power stations, and total savings would have corresponded to a substantial double-digit percentage.
Logistics (or the lack of it) has as much to do with North Korea’s food shortages as it does with power shortages. North Korea is home to hundreds of thousands of what were once pristine agricultural machines and trucks. This was because mechanization of agriculture as well as modern transportation (in addition to electrification) was one of Kim Il Sung’s most important goals for the socialist country. After the 1990s, they fell into disrepair. Many are still out of order, and the country can’t get enough spare parts or fuel. A team of foreign experts from the Swiss Development and Cooperation Agency and NGOs estimated that up to 20 percent of the annual harvest rots in the fields and never reaches consumers in the cities. That made the food shortages of the 1990s even worse.
Throughout the 2000s, the state-led business sector has been trying to repair and set up new power stations. The situation today has improved over that of a decade ago, when I arrived in North Korea. Several power stations are being built along the Huichon River, and after 11 years of construction, the largest one, with a power capacity of 300,000 kilowatts, was completed in 2012. Pyongyang is the main beneficiary, and it will suffer from fewer blackouts as a result. The dams will help protect cultivated land and residential areas along the river that have been regularly flooded in the past, helping bring about devastating food shortages. But the total power output remains substantially below the record output at the end of the 1980s, and it’s not clear when or if the nation will return to those days.
North Korea’s ailments partially grow out of its “military first” policy, which gobbles up funds that could go to infrastructure and education and instead puts them in the hands of the nation’s military. The U.S. government put forward figures, possibly exaggerated, suggesting that