NORTH KOREA LOOKS AT CHINESE ECONOMIC REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00590R000200220001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 1
• Publication Date: April 1, 1985
• Content Type: REPORT

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Directorate of Sec,
Intelligence
North Korea Looks at
Chinese Economic Reform
EA 85-10079
April 1985
Copy 3 51
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North Korea Looks at
Chinese Economic Reform
This paper was prepared by
Office of East Asian Analysis. Comments and queries
are welcome and may be directed to the Chief,
Northeast Asia Division, OEA
Secret
EA 85-10079
April 1985
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North Korea Looks at
Chinese Economic Reform
Summary North Korea, pressed by domestic and foreign economic problems and by
Information available pressure from Beijing, is taking a careful look at the economic reforms that
as of 27 March 1985 China has implemented since 1978. An unusually large number of high-
was used in this report.
level North Korean delegations have visited China in the last two years,
where they have been lectured on the
benefits of economic liberalization.
We do not believe that P'yongyang is ready to go far enough with reform to
improve the country's economic prospects substantially or its economic
relations with the West. By allowing even a hint of liberalization, however,
Kim II-song may be attempting to expand his options-and, perhaps more
important, the options for his son and designated heir, Kim Chong-il-to
pursue a more liberal economic program should the country's Marxist
policies continue to achieve results far short of the accomplishments of
South Korea and China.
P'yongyang has already taken several measures that, at least on the
surface, are consistent with a liberal reform program:
? The promulgation of a joint-venture law that allows foreign investment in
North Korea.
? The promotion of light industry to improve living standards.
? An apparent effort to decentralize economic management and increase
worker incentives.
P'yongyang, however, has given no indication that it will accept features of
market-oriented economies-such as widespread use of agricultural free
markets and small-scale, private service-related enterprises-that we be-
lieve are the key to China's recent economic success.
Past mistakes, such as the massive borrowing to import Western capital
equipment in the mid-1970s that was followed by default, continue to
thwart the influx of foreign investment or even the development of a
significant foreign trade sector, as does lack of access to natural export
markets such as the United States and South Korea. More important,
economic liberalization in China has come at a cost to the military-which
now receives a smaller share of national resources-and some of the
Communist Party's controls on the population have been weakened. In
North Korea we see no signs that either the Army or the Korean Workers'
Party is willing to relinquish the power that economic liberalization
inherently would entail.
iii Secret
EA 85-10079
April 1985
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China's interest in trying to persuade North Korea to move toward
economic liberalization stems from Beijing's concern that its own reforms
could strain political links to a doctrinally conservative North Korea.
Beijing appears to be willing to apply some pressure-refusing to increase
economic aid to the North and allowing unofficial commercial links with
South Korea to develop-but Chinese officials have told US diplomats
they doubt they alone have enough influence to effect reform in North
Korea. They warn that without Western encouragement-in the form of
better political or economic relations-P'yongyang will be ripe for in-
creased Soviet influence. Although North Korean-Soviet relations have
improved over the past two years, we see no indication that Moscow is will-
ing to increase significantly its economic aid to North Korea.
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North Korea Looks at
Chinese Economic Reform
learn about Beijing's reforms. General Secretary Hu
Yaobang visited P'yongyang in May, and Kim II-song
made a return trip to China in November (see appen-
P'yongyang has kept a watchful eye on the economic
policy shifts that have swept China in the nine years
since Mao's death in 1976. These have helped China
forge strong economic links to the United States and
could lead to overt commercial links between China
and South Korea. They have also induced remarkable
economic growth in China. Key features of the re-
forms include:
? An economic opening to the West that has greatly
stimulated foreign trade and investment.
? A shift in priority from heavy industry to light
industry with the intent of improving living
standards.
? A decentralization of decisionmaking that, if fully
implemented, will sharply increase the role of mar-
ket forces at the expense of the party and the state
planning apparatus.
At least since Kim 11-song visited China in September
1982, P'yongyang has been studying the Chinese
economic reforms for possible adaptation. In Novem-
ber 1982, for example, the North Korean party daily,
Nodong Sinmun, reported that Kim had visited
China's Sichuan Province (the birthplace of many of
the reforms under the then governor and now premier,
Zhao Ziyang) and expressed great interest in the new
production responsibility system. This system, which
has now largely replaced the Chinese commune sys-
tem, gives farmers much more freedom to manage
their farms and allows them to sell above-quota
output in relatively open markets.
Soon after Kim's visit to China
a North Korean study group had
visited the Shenzhen Special Economic Zone near
Hong Kong-China's showplace for its reforms in
action. According to press reports, four other North
Korean delegations visited Shenzhen in 1983 and 10
in 1984, including one in February 1984 led by
Foreign Minister Kim Yong-nam.
Seven or eight other high-level economic delegations
from the two countries exchanged visits in 1984,
providing further opportunities for P'yongyang to
dix A).
A visit to China by North Korean Premier Kang
Song-san last August is of particular interest. Kang, E
an economic technocrat, was installed as premier in
January 1984, just after a plenum of the Korean
Workers' Party (KWP) announced new policies de-
signed to promote light industry and exports. During
his visit to China, articles in both the Chinese and
North Korean press compared that plenum, the
Eighth of the Sixth Party Congress, with the Chinese
plenum of 1978 that had marked the ascendancy of
Deng Xiaoping and Zhao Ziyang and the beginning
of economic reforms
much of Kang's visit was devote to
discussions of light industry and that he toured a
number of factories in Beijing and Shanghai produc-
ing consumer goods
ment noted, however, that, while the reforms were
"unfolding a vigorous and bold struggle ushering in
great prosperity for China," North Korea "would
continue to work hard for socialist construction in the
spirit of self-reliance."
Kang's cautious statement notwithstanding, even Kim
II-song recognizes that the North Korean economy
stands in dire need of reform.
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The current state of P'yongyang's long-term economic
planning process also suggests a need for drastic
reforms. In his New Year's address this January, Kim
failed to mention either the Second Seven-Year Plan,
which ended in 1984, or the Third Seven-Year Plan,
originally scheduled to begin in 1985. Instead, he
referred only to accomplishments of the one-year
1984 plan and the prospects for the annual 1985 plan.
We believe, therefore, that 1985 is being used as a
buffer year before a new long-term plan begins in
1986. Even with the buffer, P'yongyang will find it
difficult to set reasonable goals, given the extent to
which industry fell short of the 1984 goals set in 1978.
We estimate that output in 1984 was only about two-
thirds of planned levels.
Because P'yongyang publishes little in the way of
valid economic statistics, it is difficult to determine
economic trends. Nonetheless,
the economy continues to suffer
from severe shortages of fuels and raw materials, long
delays in the completion of investment projects, and
low standards of quality, while the population endures
threadbare living conditions. We estimate that eco-
nomic growth has averaged only 3 to 4 percent yearly
in recent years or about half the South Korean rate.
North Korea's poor economic performance, in our
view, stems from several factors:
? The high priority given the well-equipped, offensive-
ly poised military establishment of 800,000 men.
? Kim's policy of running the economy at a pace far
beyond the capabilities of its human and material
resources.
? The Korean Workers' Party's petty tutelage over
economic activity at the national, provincial, and
local levels; Kim himself makes disruptive allocation
changes in the course of his on-the-spot guidance to
production facilities.
? The lack of foreign exchange and the deep-set policy
of chu the (national and individual self-reliance),
which have isolated North Korea from global tech-
nological currents.
We believe that only major changes in North Korean
policies or striking reforms in the economic system
will enable North Korea to improve its economic
performance over the next 10 years.
Viewed solely from an ideological perspective, P'yong-
yang might have less difficulty liberalizing its econo-
my than has China. North Korea has never experi-
enced such extremes as the Great Leap Forward
(1956-60) or the Cultural Revolution (1966-76), fol-
lowing instead a relatively conservative economic
course, more along the lines of Khrushchev and
Brezhnev than Mao. From a practical viewpoint,
however, North Korea faces serious obstacles to
reform:
? The country's large foreign debt burden and poor
reputation, which has cut it off from foreign credit.
? The reduction in defense spending needed to free
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resources for light industry.
? The weakened party control resulting from in-
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creased reliance on market forces.
Opening to the West-A Second Try?
To open the country to foreign trade and investment,
for instance, P'yongyang must first settle or at least
make a substantial downpayment on its $1.3 billion
hard currency debt, which has been in arrears since
1975. Although a jump in gold sales last year helped
P'yongyang meet principal payments to some West
European countries, North Korea missed interest
payments to Japan and in recent months has again
missed interest payments to European creditors. We
believe it would take a sustained increase in hard
currency exports and further debt payments to give
North Korea access to new credits. Instead, North
Korea has had to assign top priority to exporting to
the Soviet Union and China to satisfy their demands
that annual trading accounts be balanced.
Chinese officials claim they had a major role in
persuading P'yongyang to promulgate a foreign in-
vestment law in September 1984, and indeed the law
is very similar to one passed by Beijing in 1979.
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Joint ventures-in which foreign firms provide ma-
chinery and expertise and share either profit or
output-in theory provide a way for North Korea to
import capital equipment without using foreign ex-
change or credit. In reality, however, most potential
investors will link projects to an improved debt repay-
tasked with producing these items with whatever
spare materials and manpower that they can muster.
In 1984, according to media sources, some 1,400
consumer goods workshops were organized within
factories for this purpose. These workshops generally
account for a very small proportion of factory output
and more than likely produce goods of inferior
quality.
ment record.
Finland, for example, recently rejected a proposal for
a $12 million nonferrous mining project proposal
because of P'yongyang's outstanding debt. Other
would-be investors do not believe P'yongyang has set
up the complex legal structure that would be required
to defend their interests. As a result, P'yongyang has
registered only minor successes: some Japanese com-
panies have invested in fishing ventures that can
readily sell their produce in Japan, and a French firm
is helping build a luxury hotel in P'yongyang. Finan-
cial terms for the latter project have probably not yet
been completed, however.
Light Industry-Can It Compete With the Military?
Experimenting with light industry to increase the
supply of consumer goods and improve living stan-
dards also faces difficulties. Since the Eighth Party
Plenum in November 1983, North Korean media
have touted light industry
al-
though there is more concern for the production of
consumer goods, few new resources-either manpow-
er or capital-have been allocated to the light indus-
try sector. Instead, heavy industrial plants are being
Given the economy's inability to meet current require-
ments for raw and intermediate goods and the massive
requirements imposed by the defense industry, it is no
surprise the North Koreans have had difficulty estab-
lishing light industrial factories capable of producing
quality consumer goods. In fact, in his New Year's
message, Kim II-song stated that top priority in 1985
would go to mining, transportation, steel, and agricul-
ture in that order, making only a vague reference to
improvements in living standards. We believe P'yong-
yang would need to significantly reduce military
spending levels to allow more investment for light
industry.
Market Forces-A Threat to Party Control
growth and efficiency.
The most controversial, and what we believe to be the
most important, of the Chinese reforms comes under
the general concept of increased use of market
forces--or economic levers as Chinese and now some
North Korean literature refer to them-in economic
decision making. This is closely related to the decen-
tralization and removal of party politics from enter-
prise- and farm-level management. China has by no
means solved the problems associated with combining
features of command and market economies at the
enterprise level-in many ways it is just beginning to
face them. Even so, by allowing some individual
initiative to develop in agriculture and service indus-
tries, Beijing has sparked major jumps in economic
Kim's New Year's address as well as several articles
published in Nodong Sinmun and Kulloja (the theo-
retical monthly journal of the KWP) suggest that in
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January 1985 North Korea took a step toward decen-
tralizing economic decision making by putting an
"independent accounting system" into broader use.
First implemented on a small scale in North Korea in
1960 and similar to one adopted by China in 1979,
this system is designed to make enterprises more
responsible for their own profits and losses and to tie
worker income more closely to productivity. Under
the system, a portion of a worker's wages is dependent
on the work unit's level of output. The individual unit,
in turn, is given greater discretion in its methods for
meeting state production targets and more account-
ability for use of raw materials.
The Nodong Sinmun and Kullola articles indicate
that North Korean theorists believe this could lead to
"capitalist tendencies." They nevertheless argue that
in the transition period between capitalism and Com-
munism it is just as dangerous to disregard the
usefulness of market forces in helping to motivate
workers and manage factories.
A marked divergence from Chinese policy, however,
can be seen in P'yongyang's attitude toward party
management of the economy, at least as presented by
the country's media. In an article discussing the
independent accounting system, Nodong Sinmun, in
December 1984, stated that, to prevent any "deviation
in the slightest" from socialism, the party is imple-
menting the independent accounting system in close
coordination with the Taean Work System. The
Taean Work System, established in 1962, assigns the
KWP an important managerial function in every
enterprise. Indeed, an article in Nodong Sinmun in
November 1984 said, "The most important thing in
increasing the production of consumer goods is to
increase the role of party and government functionar-
ies in local areas." Beijing, in contrast, is trying to
remove the party from day-to-day management re-
sponsibilities in the factories.
A related issue is the replacement in China of the
commune-oriented agricultural system with one that
lets-farmers exercise more freedom in managing their
farms and marketing their above-quota produce.
North Korea has been generally tolerant of small
private plots and rural markets, but in the 1970s the
trend was toward increasing collective and state con-
trol over farmers. In 1977, for instance, P'yongyang
cut the maximum legal size for a private plot in half.
Aside from Kim's expressed interest in China's new
agricultural system in 1982, we have little evidence
that P'yongyang has liberalized its policy.
The tentative nature of P'yongyang's experiments
suggests that North Korea is unlikely in the short
term to take reforms far enough to make a major
difference in its economic prospects. The economic
needs are great, but the political and security costs-
particularly the weakening of party control over the
populace-of opening to the West and allowing mar-
ket forces to operate, even on the scale now being
allowed in China, must still appear prohibitive to
P'yongyang.
The flexibility that P'yongyang is exhibiting, even in
terms of its modest reforms, suggests that over the
longer term-most likely after the death of Kim Il-
song-major changes in economic policy are possible,
perhaps even likely. Certainly Kim has made it easier
for his son, Kim Chong-il, to align himself with a
reformist faction after the elder Kim's death if the
situation warrants.'
Whether North Korea takes a reformist path may
depend in part on China-both the success of Bei-
jing's own reforms and the degree to which it can
pressure P'yongyang to follow suit. China's active
interest in North Korean issues over the past year has
been demonstrated by the number and level of official
exchanges with North Korea and by Beijing's willing-
ness to intercede on P'yongyang's behalf with Wash-
ington and Tokyo on the issue of North-South talks.
' In a similar vein, we believe that Kim II-song's recent initiatives
toward South Korea and improvement of relations with the Soviet
Union may be designed to give Kim Chong-il more room for
maneuver.
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stressed the need for North Korea to
liberalize its economy and achieve some degree of
economic parity with South Korea before talks of
unification could be seriously entertained. Beijing
claims, moreover, that Kim 11-song appears genuinely
interested in reforms but that he needs a great deal of
economic aid from China and better trade relations
with the West for the reforms to succeed.
The Chinese statements also include warnings that
their ability to aid and influence North Korea is
limited and that the Soviet Union may be using
China's tilt to the West to gain advantage in P'yong-
yang. North Korean-Soviet political relations have
warmed over the past two years, but we have no
indications that the Soviets are willing to provide
more economic assistance. Despite being North Kor-
ea's major supplier of oil and coal, Beijing finds it
difficult to get P'yongyang to meet its annual export
commitments, let alone make fundamental economic
policy changes (see appendix B).
Even at the risk of alienating North Korea, China is
putting some pressure on P'yongyang.
Beijing signed an aid agreement for
North Korea's 1986-92 economic plan in January that
offers no increase in the level of aid over the 1978-84
plan period. P'yongyang had asked for a sharp in-
crease, especially in oil deliveries. P'yongyang has
made no mention of the aid agreement, which was
given media treatment by the Chinese, a fact that we
read as an indication of North Korean dissatisfaction.
A more subtle and possibly more effective pressure
tactic may be China's recent laissez faire attitude
toward its own trade with South Korea, including its
willingness to let key South Korean industrial leaders
visit China and discuss joint venture projects. Public-
ly, Beijing continues to disavow direct commercial
links with South Korea, but we estimate that "unoffi-
cial" trade is now above the level of Chinese-North
Korean trade.'
' We estimate that South Korean-Chinese two-way trade in 1984
totaled $625 million, compared with our estimated $600 million in
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Appendix A
North Korea-China:
Selected Economy-Related Delegations,
1984-85
To celebrate 30 years of railway cooperation.
Same.
Main issue probably the tripartite talks proposal but includ-
ed economic discussions, particularly at Shenzhen.
21 Jan Chinese Minister of Railroads visits P'yongyang.
28 Jan North Korean Minister of Railroads visits Beijing.
7-14 Feb North Korean Foreign Minister Kim Yong-nam visits
China, including Shenzhen Special Economic Zone
(SEZ).
25 Apr Chinese Vice Minister of Foreign Trade visits Pyon-
gyang.
4 May Chinese General Secretary Hu Yaobang visits North
Korea.
17 Jun North Korean Minister of External Economic Affairs
Chong Song-nam visits China.
19 Jun
Wide-ranging discussions. Hu states that North Korea is
making "maximum effort to promote economy and living
standards."
P'yongyang Municipal Committee visits Beijing. To discuss urban problems.
31 Jul Korean Workers' Party delegation led by Kye Ung-te
visits China-goes to Shenzhen SEZ.
5-10 Aug North Korean Premier Kang Song-san visits Beijing and
Shanghai.
14-21 Sep Chinese Minister of Commerce Lin Yi visits North
Korea.
5-12 Oct North Korean Vice Foreign Minister Kim Chae-suk
visits China.
8 Oct Chinese Vice Foreign Minister Xao Guang visits North
Korea.
Annual meeting to discuss electric power shaping and
construction of Yalu River hydropower plants.
Invited by Hu Yaobang.
Met by Chinese President Li Xiannian who states, "We 25X1
must learn from each other." Visits small-scale service
industry. 25X1
the visit is dominated by
economic issues including considerable discussion of li ht
industry and foreign investment.
North orea promulgates joint venture law soon alter ang
returns to P'yongyang.
Met by Kim II-song. Yi states he has come "to learn more
about North Korean commodity circulation." P'yongyang
subsequently makes major changes in domestic commerce
system.
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North Korea-China:
Selected Economy-Related Delegations,
1984-85 (continued)
29 Oct Chinese coal experts visit North Korea.
31 Oct North Korean synthetic fiber delegation visits Beijing.
26-28 Nov Kim I1-song makes "unofficial" visit to China.
18 Dec North Korean Minister of Construction Cho Chul-chun
visits China including Shenzhen.
31 Dec North Korean Foreign Minister Kim Yong-nam visits
Beijing.
25 Dec North Korean Academy of Sciences vice president, Cho
Chang-hui, visits Beijing.
North Korean Vice Minister of Foreign Trade visits
Beijing.
13-17 Jan North Korean Vice Premier Kong Chin-t'ae visits Bei-
jing.
economic reforms. Kim stated he intends to revitalize North
Korea's foreign trade and improve living standards and to do
that he needs peace. Visit immediately follows breakdown in
North-South talks because of Soviet defector incident at
DMZ.
To "acquaint" themselves with Chinese accomplishments.
Kim on his return from a trip to Eastern Europe and Iran.
Signs 1985-86 plan for scientific cooperation.
Signs new aid agreement, presumably for North Korea's
new Seven-Year Plan period. Zhao states, "China wishes it
could fulfill more of its international duties." Kong thanks
China for economic assistance and support, but North
Korean press fails to report the agreement.
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Appendix B
North Korea-China:
The Trade and Aid Relationship
China's primary importance to North Korea, from an
economic standpoint, is as a source for oil and coking
coal. China provides about half of North Korea's oil
and almost all of its coking coal. Oil exports have
increased slowly over the last decade but, with that
exception, the volume and scope of two-way trade
have remained substantially the same since the mid-
1970s (see figure 1).
The major impediment to expanded trade is North
Korea's inability or unwillingness to increase the
volume of its exports to China. These consist primari-
ly of anthracite coal, cement, nonferrous metals, and
various manufactured goods.
P'yongyang has suppli
Figure 1
North Korea: Trade With China, 1975-83
roughly 75 percent of the
value of goods promised in the annual protocols. 50
Beijing, meanwhile, has met about 85 percent of its I
commitments. This imbalance has led to a buildup of 0 1975 76 77 78 79 80 81 82 83
about $500 million in debt that P'yongyang owes
Beijing. No interest is charged and, for all practical a Chinese RMB divided by 1983 US dollar exchange rate.
purposes, shortfalls in North Korean transfers become
de facto Chinese aid.
Probably in response to large North Korean export
shortfalls in 1983, China slashed its shipments to 30,000-barrel-per-day (b/d) refinery is the second
North Korea in early 1984. This get-tough policy built in North Korea. (The first is a similar-sized
appears to have had the desired effect, as had similar plant built with Soviet aid at Unggi in the early
tactics in 1978 and 1982. According to press articles, 1970s.) Ponghwa, served by a short pipeline from the
P'yongyang in 1984 gave top priority to exports to Chinese city of Dandong, processes all of the Daqing
China and the Soviet Union. Moscow had also threat-
ened to cut exports.
China is also important to North Korea as a source
for major industrial facilities, provided on an aid
basis. This project aid, however, is much smaller than
provided by the Soviet Union. The most important
Chinese aid project in the Seven-Year Plan (1978-84)
was the completion of the Ponghwa (also known as the
Paengma-ri) petroleum refinery near Sinuiju. This
crude oil imported from China.
Other major Chinese aid projects include a recently
completed papermill at Hysean, a 200-megawatt ther-
mal power plant near Anju completed in the late
1970s, equipment for a 30-kilometer expansion of 25X1
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Figure 2
North Korea- China: Economic Cooperation Projects
I Jiang
/Yj/ Yalu
g~a'n`g Jf Hyesan
anp'o-si G?I l Paper mill
/ 'Kuandian
i Sup'ung
*,NW Paengma-ri Petroleum Refinery
iju $
OWN
enf bag factory
MHaeju
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P'yongyang's subway system (which had been deliv-
ered but not installed by 1983), a cement bag factory
in Haeju, and a textile plant in P'yongyang, the
construction status of which is not known. North
Korea and China are also jointly building two new
hydropower plants on the Yalu River, adding to the
series of dams from which they share electricity
fewer than 100 Chinese engineers were in North
Korea helping with these projects in mid-1984, indi-
cating that most of the aid consists of equipment
transfers and not construction help. In contrast, the
Soviet Union has several hundred and perhaps as
many as a thousand technicians in North Korea.
Moscow boasts that it has provided the facilities that
produce 63 percent of North Korea's electric power,
50 percent of the petroleum refining and coal mining,
and 33 percent of its steel.
Declassified in Part - Sanitized Copy Approved for Release 2011/11/17: CIA-RDP86T0059OR000200220001-9
 Declassified in Part - Sanitized Copy Approved for Release 2011/11/17: CIA-RDP86T0059OR000200220001-9
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/11/17: CIA-RDP86T0059OR000200220001-9