How the North Korean Economy Works

The country of North Korea, officially known as the Democratic People’s Republic of Korea (DPRK), has an isolated and tightly controlled command economy. In a command economy, the economy is centrally planned and coordinated by the government, making it a standard component of any communist country.

The government of North Korea determines what goods should be produced, how much should be produced, and the price at which the goods are offered for sale. 

A Brief History of Korea

Korea was historically an independent kingdom. However, following the Russo-Japanese War, the Korean peninsula was formally annexed by the Japanese. Korea remained a Japanese colony from 1905 to 1945.

After World War II, the Japanese forces in the northern region of Korea surrendered to the Soviet Union, and Soviet troops took control of the northern region of the country. At the same time, American troops took charge of the southern region.

The newly separated regions appointed their respective leaders, and in 1950, North Korean leader Kim II-Sung (backed by the leadership of the Soviet Union) attempted to capture the U.S.-backed southern region of Korea (the Republic of Korea, or ROK), sparking the Korean War, which lasted from 1950 to 1953.

Kim II-Sung's attempt to capture the southern region of Korea and bring the entire peninsula under his communist rule was ultimately unsuccessful. The resulting stalemate split the Korean peninsula roughly in half. North Korea (DPRK) established its national economy through heavy industry-first development and military-economy parallel development. South Korea (ROK) established one of the world's most advanced modern-day economies.

North Korea’s Economy

The first phase of North Korea's economic development, following the division of the formerly unified kingdom, was dominated by industrialization. This was a difficult task, considering the damage the country's infrastructure weathered during the Korean War. North Korea assumed the Soviet model of governance and centrally planned socialist economics, as well as the ideology of juche (self-reliance). This model emphasized the development of heavy industry and investments in the iron, steel, cement, and machine tool sectors.

Mid-1900s

Many experts believe that these policies of the North Korean government, beginning in the aftermath of the Korean War, have been an obstacle to the country's economic development. The shortcomings of these policies were accentuated by the regime's focus on songun (a style of military-first politics), which has worsened North Korea's chronic economic problems. In the decades following the Korean War, there has been consistent stagnation in the region's industrial and power output.

The North Korean economy entered one of its worst phases of stagnation—and almost collapsed—in the 1990s. The disintegration of the Soviet Union, followed by a food crisis in the aftermath of a series of natural disasters–hail storms in 1994, flooding from 1995 to 1996, and droughts in 1997–pushed North Korea into an economic crisis. Between 1990 and 1998, the country experienced an average annual growth rate of -4.1%. The country became the recipient of international food and humanitarian aid in the mid-1990s, which continued until it closed its borders to prevent the spread of COVID-19 in 2020.

Early 2000s

In the 2000s, North Korea expanded its tactics for recovering its economy. In 2002, it eased some restrictions in order to allow semi-private markets and launched a series of economic reforms that it referred to as Economic Management Improvement Measures. Some of these measures included:

• An increase in both prices and wages
• A shift in the price-fixing mechanism
• Changes in the distribution system
• Decentralization of national planning
• An increase in the autonomy of enterprise management
• The opening of the distribution market for production methods
• Differentiated distribution
• Social security system reform

Economic growth picked up for a few years, and this period was considered an improvement over the previous decade.

Gross Domestic Product

The gross domestic product (GDP) of North Korea was estimated to be $16.3 billion in 2021, according to the latest data from the United Nations. In terms of GDP per capita, North Korea had a per capita GDP of $639. Agriculture accounts for 21.2% of GDP, industry accounts for 44.7%, and services account for 34.1% (according to the latest available data).

The country still makes significant investments in its military, and some analysts claim that this expense may come at the cost of its economic development. In 2016, the last year for which estimates were available, North Korea spent an estimated $4 billion, or approximately 24% of its gross domestic product (GDP), on defense spending.

Trade

Today, China is North Korea's main trading partner. North Korea relies on China for both economic and diplomatic assistance. The country's main exports are metallurgical products, electricity, instruments, silk, and potato flour. The main import items for North Korea are medicines, rubber and tires, fertilizers, polymers, tobacco, and soybean oil. More than $260 million in imports came from China in 2021 (according to the latest available data).

Limitations of Economic Data

North Korea is known to be secretive, and it does not release economic data. The region has not published any official indicators or statistics on its macroeconomic conditions since 1965. The few sources for basic statistics on the North Korean economy include the United Nations, volunteer organizations, and other economics data aggregators and analysts around the world.

The Bottom Line

The economic history of North Korea includes significant periods of stagnation and crisis, with intermittent phases of recovery and some economic growth. The regime’s priority to make Korea a defense economy has overshadowed development, food production, living standards, and human rights.

A major issue currently facing the country is human trafficking; many men, women, and children are subjected to forced labor and sex trafficking. North Korea is a primary source of labor for foreign governments, most often Russia and China. North Koreans do not have a choice in the work the government assigns them, cannot change jobs, and face punishment from the government if they try to escape their forced labor.