After the fall of the Soviet Union, world politics shifted away from the conflict between communism and capitalism that had characterized much of the 20th century. But in northeast Asia lies one of the last relics of the Cold War and the last Stalinist state, the Democratic People’s Republic of Korea, commonly referred to as North Korea. Ruled by a dictatorship that sheltered its citizens from the putative poison of decadent Western culture and influence, North Korea existed in almost complete isolation from the West for decades. However, recent economic reforms and attempts at fostering political discourse with its neighbors mark a conspicuous departure from previous foreign and domestic policy for this international enigma. Once a staunch proponent of communism and national self-reliance, or juche, North Korea has devalued its currency 70-fold, allowed prices and wages to be determined by markets, partially eliminated rationing, and announced the creation of a Chinese-style special economic zone (SEZ) open to foreign investment. This arrangement is radically different from traditional North Korean socialism.

On the political front, North Korea has re-opened dialogue with Japan, admitted abducting 13 Japanese citizens in the 1970s and 1980s, begun limited de-mining of the Demilitarized Zone (DMZ), and agreed to the creation of the first railroad link between the two Koreas since World War II. As promising as these developments appear, however, North Korea is unlikely to begin an immediate economic revival like the one China experienced two decades ago. North Korea’s unusual new economic reforms and diplomatic initiatives are misguided attempts to reinvigorate a decaying economy and curry international favor and concessions. In the long run, many of its economic changes and diplomatic maneuvers may prove self-defeating.

Only a serious crisis within the economy could persuade North Korea’s government to change its socialist ways. The dramatic decline of the North Korean economy began with the loss of Soviet subsidies and trade following the collapse of the Soviet Union in 1991. North Korea’s exports plummeted while its leader, President Kim Il-Sung, refused to reduce imports. Furthermore, military expenditures continued at a level that enabled this country of slightly more than 22 million people to maintain the third largest army in the world. The results were disastrous—gross domestic product (GDP) fell by 50 percent between 1992 and 1997. Worst of all, a devastating famine engulfed North Korea, forcing the reclusive government to appeal to the World Food Programme for aid. While help did come, the humanitarian group Doctors Without Borders estimates that at least 10 percent of the population perished. With a decimated population, a decade of economic recession, and a dearth of communist allies, North Korea has begun to infuse capitalist elements into its supposed workers’ paradise.

Getting Ahead

Logic would dictate that North Korea, which is devoid of any substantial capitalist experience in the last half-century, should begin reform with baby steps. Instead, the government has embarked on several dramatic reforms. Beginning in summer 2002, the North Korean government lifted most price controls and allowed market forces to set prices by supply and demand. Although initial results do not necessarily predict the future, the new policies created huge discrepancies and asymmetries in the economy. While average wages increased 200 times, the price of rice rose 400 times, diesel fuel 40 times, and electricity 60 times. Furthermore, the North Korean government has made no move to integrate private enterprise into the economy, an omission that could cause catastrophic problems in the future. Allowing demand to run rampant while limiting supply by suppressing private enterprise only exacerbates inflation. On the other hand, in a move that foreshadowed the new SEZ and desire for foreign investment, the government slashed the official value of the North Korean currency from the rate of 2.15 won to the US dollar to 150 won to the US dollar. The devaluation of the won to better reflect its market value has been hailed as a wise decision that should help increase trade.

North Korea’s efforts at reform is reminiscent of perestroika, the late 1980s restructuring that Premier Mikhail Gorbachev implemented in the Soviet Union shortly before its collapse in 1991. With decentralization occurring in a large number of industries, managers were suddenly presented with decisions that they lacked the experience to make. Similarly, the rapid pace of change in North Korea has forced the general public to confront many unfamiliar decisions on a daily basis. Workers without any experience in budgeting will no longer be provided with all their food and shelter by a state rationing system. As demonstrated by the fate of the Soviet Union, these transition problems can prove stubbornly persistent.

North Korean reform has also taken on a decidedly Chinese twist. In September 2002, North Korea announced plans to develop a version of China’s SEZs in order to attract foreign investment. This new zone is to be located in Sinuiju, which lies along the Yalu River bordering China on the west coast of the Korean peninsula. The plan calls for 500,000 current Sinuiju residents to be replaced by 200,000 technically skilled new residents from North Korea and China. Estimates place the shipping capacity of the 50-square-mile region at 12 million tons per year, and the nearby Supung hydroelectric power plant will accommodate all of the region’s energy needs. The North Korean government has declared that Sinuiju would be a semi-autonomous region with its own legislature and the right to private property. Although the government eventually retracted a promise to allow foreigners to enter the region without visas, there will be other incentives to lure foreign investment. The US dollar will be an official currency and the income tax will be capped at 14 percent. This economic gambit is frequently compared to China’s first special economic zone in Shenzhen in 1979. A sleepy fishing village prior to the reforms, Shenzhen ballooned to a population of seven million. Its success convinced China to launch five more zones of the same type. Just over a decade into this capitalist experiment, the five zones in existence in 1991 were responsible for 15 percent of China’s US$57 billion in trade that year.