The North Korean Economy Explained

There is an excellent podcast available through the FT Alphachat Series featuring Matt Klein’s interview of Marcus Noland, a researcher at the Peterson Institute for International Economics who has spent a significant amount of time studying the North Korean economy.

The background information included with the podcast is also worth reading. This section in particular struck a chord with me:

The North Koreans depended on subsidies from the Soviets to survive, particularly the ability to buy oil and refined petroleum products at “friendship” prices. As the Soviet economy creaked under the combined weight of the war in Afghanistan, low oil prices, and the perceived need to match America’s defence buildup, these concessions started to disappear. By the late 1980s the North Koreans were paying more to the Soviets than they were getting.

One of the downsides of the North Korean obsession with self-sufficiency was that the country ended up with the most industrialised agricultural sector in the entire world. The only way the North could hope to feed itself without imports was to bathe the soil in fertiliser and other chemicals. (Of course, that required imports of energy from the Soviets, but apparently that was okay…) The North Koreans also expanded farmland by cutting down trees, which eventually led to soil erosion, silted rivers, mudslides, and floods.

All of this meant that the collapse of the Soviet Union made the North Koreans extremely vulnerable to food shortages. In the mid-1990s these shortages combined with the failures of the North Korean state to efficiently distribute the food they had and secure enough food from abroad through aid and imports. The result was a famine that killed about 3-5 per cent of the North Korean population — around 1mn people. (Regular listeners will think of Cuba’s “special period”, which killed far fewer people but had similar causes.)

Without spoiling the podcast here are a couple of high level takeaways from my POV:

Centrally planned economies do not work. In the cases of the Soviet Union, China, North Korea and Cuba, central planning, at its best, manged to produce substandard consumer goods. At its worst, central planning actively contributed to the deaths of millions through the misallocation of resources. The misallocation of agricultural resources has proven particularly devastating.

These lines from the 1965 film version Boris Pasternak’s Dr. Zhivago are fairly evocative:

Don’t be too impatient, Comrade Engineer. We’ve come very far, very fast […] Do you know what it cost? There were children in those days who lived off human flesh. Did you know that?

Autarky does not work. North Korea is probably the closest thing we have to a true autarky. And yet, even in its much diminished state the North Korean economy is still not a true autarky! Initially it was dependent on the Soviet Union. Now it is dependent on China.

Markets do work. The Soviet Union, China and North Korea each developed market-based solutions to the massive inefficiencies created by centralized economic planning. In the early days of the Soviet Union, Lenin launched the New Economic Policy (later abolished by Stalin).  In China, it is the advent of a “socialist market economy” (which, unfortunately, has evolved into a massive kleptocracy). In North Korea, market-based solutions to famine arrived in the form of small scale, informal trading relationships, as well as a black market for food.

There is much more than this in the podcast, however. So do give it a listen.

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