The second half of the twentieth century was a story about venturing out. In the free world, it was the age of Star Wars and Star Trek, of giant leaps and daring rescue missions, filled with dreams of rocket ships and flying cars. In the Soviet bloc, it was the age of pioneering dogs and Sandmännchen in space, of satellites and cosmonauts, of space elevators and socialist achievement. Yet it was not until the twenty-first century that one of our greatest insights arrived from space. In 2010, a NASA satellite zoomed in on the Korean peninsula, snapping a photo that succinctly illustrated the difference between communism and capitalism: in the north, darkness; in the south, light.
The photo posed the question: how could it be that two nearly identical countries are so far apart in their economic development?
You are probably familiar with the common understanding of how these differences came to be: over the past half century, South Korea embraced a market economy and free trade, while the North maintained a command economy and strictly controlled foreign trade. It may then surprise you to know that this hasn’t always been the narrative. From the 1940s through the 1970s, North Korea appeared to be the more developed of the two. Because of this striking difference, as late as 1961, even mainstream economics textbooks in the West predicted that communist countries would soon leave market economies in their dust.
Nothing to Envy: 1946 to 1970
To understand how the developmental gap between North and South arose, it’s helpful to go back to the origins of the North Korean system. Shortly after the Soviet Union handed the northern half of the Korean peninsula over to Kim Il-Sung and the Workers’ Party of Korea in late 1945, the “supreme leader” began expropriating property. An early land reform in 1946 redistributed much of the land from its existing landowners to peasants in an effort to secure political support. Industry was nationalized and was placed under the control of party operatives.
Though North Korea’s industry was damaged by the Korean War, the country rapidly redeveloped. Under the guidance of Soviet planners, and massive aid from other communist countries, state planners undertook the relatively straightforward task of rebuilding the economy. Peasants were forced on to collective farms and smaller industrial activities were taken over by the state. By 1957 the free trade of grain was made illegal and food rationing was established by the Public Distribution System (PDS). The massive industrialization push, funded by generous aid from the Soviet Union, enabled North Korea to rapidly overtake South Korea in terms of economic development.
Falling Behind: 1971 to 1990
But their dominance wasn’t meant to last. North Korean authorities devised a system dependent on expert central planning, selfless workers, and ideologically committed officials. In South Korea, however, a market economy slowly emerged, emphasizing local knowledge, entrepreneurial activity, and international trade. While the South’s system started slow, and increased its efficiency over time, the North’s system started strong, but quickly showed signs of weakness.
Lacking property rights, the communist system relied on fear of punishment rather than profits to keep workers productive. Collective farms, as in Stalinist Russia and Maoist China, generally underperformed. Industrial output stagnated as managers focused on meeting production quotas, whether by actually increasing output or fudging the numbers. North Koreans were constantly monitored by the state and subject to the whims of state planners, who determined where they would live and work. Without economic liberties or private property, North Korean subjects lost their ability and incentive to innovate. By 1970, South Koreans were already significantly wealthier and healthier than their northern brethren.
Nevertheless, the communist system survived. Despite the regime’s emphasis on self-reliance and independence, the country became almost entirely dependent on China and the Soviet Union. As tensions rose between the two communist superpowers, North Korea played one against the other to secure generous aid from both. As a face-saving measure, the aid was typically masked in the form of lopsided trades—North Koreans would exchange low-quality manufactured goods for much needed resources like oil and industrial technology.
Markets at the End of the World: 1991 to 2002
Following the collapse of the Soviet Union in 1991 and an improved relationship between Russia and China in 1989, aid and favorable trading practices from the two countries rapidly disappeared. By all metrics, the North Korean economy completely collapsed. Between 1991 and 1999 the country’s GDP shrank by an estimated 37.6%, with industrial output halving during this period. Without access to subsidized foreign fertilizer, the already inefficient collective farms failed.
The situation continued to deteriorate, as a loss of cheap fuel left the country’s energy hungry irrigation system without power. The PDS and other state rationing systems quickly shut down, leaving millions of North Koreans without access to food. The combination of dependence on other communist countries and bureaucratic mismanagement produced the Great North Korean Famine of 1996 to 1999, resulting in an estimated 600,000 to 1,000,000 deaths.
For all intents and purposes, the Stalinist system of central economic planning developed by Kim Il-Sung ended. Unable to feed the regime’s bureaucracy, systems of surveillance and social control broke down. In the countryside, farmers fled to the mountains to cultivate private crops. In the cities, systems of household production and market exchange naturally emerged. As men were required to continue showing up to shuttered state-owned factories or risk imprisonment, women drove the creation of dynamic urban marketplaces. Emergent black markets and generous foreign aid helped stop the economic bleeding by the turn of the century—though by then the damage was done.
Despite the high ideals and lofty rhetoric of North Korea’s communist regime, the country exited the twentieth century as one of the poorest countries on Earth. By the time satellites from the developed world crept across the Korean peninsula, the difference between the North’s central planning and the South’s markets was clear.
Yet like the glimmers of light nestled in the dark North Korean landscape of the NASA images, there are still reasons for hope. At the darkest moments in North Korea’s economic history, entrepreneurial Korean women refused to give up in the face of policy-induced famine and against all odds created a black market that has likely saved millions of lives. When all seemed lost, people laid the groundwork for a subversive marketplace that continues to empower individual Koreans and undermine the regime’s authority to this day.