Wall Street Journal Asia

Little Hope for Change in Pyongyang

Senior Fellow

In the first public New Year's Day address by a North Korean supreme leader for 19 years, Kim Jong Eun declared that improving living standards and building the economy will be his top two priorities. He urged a "radical turn in the building of an economic giant with the same spirit and mettle as were displayed in conquering space."

How seriously should we take this pronouncement? The focus on economic growth rather than military might is certainly encouraging, and it follows on from a "Ten Year State Strategy Plan for Economic Development" announced last January.

However, it's telling that there were no details about what form reform will take. The role of the military in North Korean politics and economics has not changed significantly over the first year of Kim's rule. Until that happens, one should remain skeptical that change is coming.

It's worth recalling that North Korea was not always an economic basket case. When China began its reforms in 1978, North Koreans were better educated than their Chinese counterparts and had a similar GDP per capita to South Koreans. The country's economy was more open than China's when measured by international trade per capita.

Of course, some portion of the North's prosperity was due to subsidies from the Soviet Union. But after the death of Kim Il Sung, the turn toward even more radical autarkism in the form of the "military first" policy created calamity. Up to 3.5 million people out of a population of around 24 million people died of hunger from 1994-98.

To prevent mass starvation, Pyongyang now depends on foreign aid attained through a combination of bluster, threats and subsequent (always dishonored) promises to play by international rules. Its nuclear weapons and ballistic missile programs are closely linked with this extortionist strategy.

Since 1995, North Korea has received more than $1 billion in aid from America and $4 billion from South Korea. Although Beijing is opaque about its relations with the hermit kingdom, Chinese trade statistics suggest that Pyongyang has benefited from net transfers of approximately $10 billion over the same period. To put all this in context, North Korea's GDP (measured by purchasing power parity) is around $40 billion each year.

Despite all these transfers, the tragic joke about the North Korean economy is that it remains a planned economy without a plan. At the least, the drive for production is subordinated to the requirements of the regime whose first priority is to remain in power.

As in the most brutal dictatorships, the military enjoys too central a role. This is evident in an official military budget of about $6 billion each year, with international analysts putting the figure closer to $9 billion—at least one-third of government spending. At almost 1.2 million active personnel, the People's Army is the fourth largest in the world.

But the primary role of the military in the economy itself poses the most formidable barrier to reform. The People's Army is the largest, best funded and most capable institution in North Korea. For example, it supervises and controls the country's 3,000 cooperative farms. It reserves one quarter of the country's annual agricultural output for itself, sending out trucks periodically to carry away as much of the country's produce as it deems appropriate.

The military has also earned hundreds of millions of dollars selling missiles and other weapons to Iran, Pakistan and Syria. It now manages almost all of the country's major mines, with most of the magnesite, zinc, iron and tungsten going to China. The export of minerals to China has increased to around $250 million today from $15 million in 2003.

Reform, and a general uplift in living standards, would require the military to relinquish control of the country's agricultural and mineral resources. Even returning control over these resources to a planned economy with some room for citizens to engage in profitable commercial activity could yield growth and a substantial increase in living standards.

But with an enormous and hungry army to feed before its own people, and with the country's mineral reserves worth an estimated $5.4 trillion at current prices, Kim will find it difficult to change the "military first" policy. It is also unlikely that North Korea can exploit its cheap and willing labor and pursue the East Asian export-dependent approach to development as long as the military uses lowly paid soldiers as workers and crowds out non-military enterprises. There is even emerging evidence that a designated percentage of all revenues from commercial activity goes straight to the military, possibly explaining the discrepancy between the official military budget and estimated spend by outside experts.

On balance, the military seems to have acquired even greater economic relevance since Kim Jong Eun's ascension in December 2011. So while there are glimmers of hope that the supreme leader means what he says about reform, such as activity in the special economic zones and the North-South joint venture Pyonghwa Motors, until we see signs that the economic role of the military is weakening, 2013 doesn't augur well for the North Korean people.