KOREA FOCUS

For a general understanding of North Korean economy, it is necessary to observe the macroeconomic indicators of the country. Yet, there are a number of limitations in collecting concrete figures because of the North`s peculiar socialist economic system. To make matters worse, North Korea rarely reveals its economic indicators, and the statistics that are officially released raise questions over accuracy and compilation methods. Therefore, it is often risky to scrutinize the North Korean economy with the macroeconomic approaches of capitalist economics.

 

To overcome these limitations, economists employ a variety of means to measure the North`s economy. More often than not, presumptive calculation is made by applying capitalistic concepts and taking into consideration the characteristics of the North Korean system, its economic circulation and the particular economic circumstances of a specific year. Such is the case of the gross national income, or GNI, a market economy concept that does not exist in the socialist North.

 

GNI is supposed to represent a nation`s level of welfare to a certain extent, if not directly. Consequently, whenever the Bank of Korea produces North Korea`s per capita GNI, it confuses academic circles. According to the BOK`s estimates, North`s Korea`s GNI is comparable to that of China, Vietnam and the Philippines, but in fact, the North, where people don`t even have enough to eat, is much poorer than these countries.

 

Critics have constantly questioned the BOK`s methodology in calculating the GNI and other macroeconomic data of North Korea. To be sure, the South Korean central bank`s periodic estimate of the North`s GNI is invariably criticized as being too high or too low. Such controversy is unavoidable until North Korea adopts a market economy through reform and officially provides accurate data to the outside world.

 

When they make international comparisons, there is the tendency among some North Korea watchers to directly cite figures from the BOK, which uses a production-based approach in its metrics. This assumes that North Korea`s distribution system is similar to that of other normal states. The assumption is unrealistic, however, considering the extreme poverty of North Koreans.

 

In this study, we will question whether the North Korean economy has a normal distribution structure comparable to other countries and whether the GNI in the North is mostly transferred to the consumption process. In doing so, our focus will be on probing the basis of expenditure from the macroeconomic standpoint rather than the validity of the BOK`s production-based approach. We will not repeat questioning the accuracy of the BOK figures. We respect the BOK`s ceaseless hard efforts and we will seek to make correct interpretation of the bank`s figures. In this process we will also be able to check the accuracy of the figures.

 

Macroeconomic distribution (expenditure) in North Korea can be divided into accumulation and consumption. “Accumulation” in the socialist system, which corresponds to “investment” in the capitalist economy, means the material basis for production expansion and reserve resources. The methods of accumulation in a socialist economy differ from those of the capitalist economy. While investment in the latter is made through spontaneous savings of various economic players, the socialist accumulation is made by the central government, which creates funds for production expansion, construction and reserves.

 

North Koreans have savings too, but their total amount is not big enough to be used for investment. In the state funds, the allotment for production expansion is used to build production facilities; the construction fund is for the construction of such non-production facilities as homes and public buildings; and the reserve fund is for natural disasters and other unpredictable developments. Funds for production expansion account for the greatest portion of the entire state funds.

 

In North Korea consumption is largely divided into productive consumption and nonproductive consumption. Productive consumption means the use of machinery, raw materials, fuel and other resources in the process of production and unproductive consumption means all consumptive activities unrelated to production. Consumption in North Korea generally refers to unproductive consumption. It mainly consists of wages. Hence, the earnings of workers are considered the most important factor in measuring the consumption level of North Koreans. The spending for scientific, educational, cultural, and hygienic and medical activities, and for social security, management of state organizations and defense comprise the rest of the unproductive consumption.

 

Large-scale expenditures in North Korean are mostly materialized through socialist distribution by the state sector. Expenditures by private enterprises are nonexistent in North Korea. It therefore is realistically unfeasible to look into the expenditures of GNI by different economic entities. In view of the operational characteristics of its economy, expenditures of GNI in the North may be seen to consist of defense costs, accumulation (investment) and consumption, which are mostly conducted by the government.

 

Military spending in North Korea is a top priority under the “Military First” policy of Kim Jong-il. North Korea has officially acknowledged that defense accounts for 15 to 16 percent of its annual national budget. In the civilian sector, accumulation, or investment, is another high priority. So the payment for labor and social security comes after military expenditures and accumulation.