Dongho Jo is a Professor of North Korean Studies at Ewha Womans University. He is also the Chair of the Center for North Korea Studies at the East Asia Institute.

On April 5, 2009, North Korea carried out a rocket launch. North Korea argued that it was a satellite launch vehicle rather than a warhead-carrying ballistic missile, and portrayed the launch in innocuous and civilian terms, even naming the rocket “Unha,” which means “Galaxy” in Korean, to emphasize its space-oriented function. However, most nations, including Japan, South Korea, and the United States, suspect that these words were only a cover for a test of North Korea’s long-range missile technology. In addition, North Korea conducted an underground nuclear test on May 25, followed by several launches of short-range missiles from its east coast. Furthermore, North Korea test-fired four short-range missiles on July 2 and additional seven missiles on July 4, despite the United Nations Security Council’s unanimous adoption of Resolution 1874 on June 12, condemning North Korea’s hostile activities in the strongest possible terms.

Why has North Korea gone ahead with its provocative actions in the face of serious opposition from most of the outside world? To date, analysts have focused on the political aspects of the missile launch. They speculate that its purpose was to push the United States toward bilateral dialogue or to pressure the South Korean government to return to its more positive stance known as the “sunshine policy.” Others argue that the launch was meant to strengthen leadership’s weakening hold inside the country and to ensure its dynastic line of succession. All of these explanations are plausible, and North Korea, of course, may have had multiple goals.

But observers seeking to understand the North Korea’s actions are missing one critical component: the economic factor. The North Korean economy was in very poor shape in the 1990s and is still experiencing difficulties. This economic hardship, however, has not only been evident in recent decades but had already begun in the early 1970s, mainly due to lack of capital. Since then, the country’s top economic priority has been to determine how to encourage foreign capital to help the North Korea escape from economic shortages. One alternative pursued since the mid-1990s has been to develop the missile program as an effective means of earning foreign exchange. Understanding the part played by the economic situation in North Korea’s decisions about its missile program is the purpose of this brief article.

Capital as a Key Element for Economic Growth

After the Korean War ended in 1953, rapid economic growth was the preeminent task for both North and South Korea. Economic growth was needed not only to restore the industrial production bases that had been destroyed during the war and to raise the extremely poor living standards but also to demonstrate to the people the superiority of the economic system established in their half of the country. Whichever half had faster economic growth would add to its legitimacy on the divided Korean Peninsula.

Economic growth is defined as the increase in the amount of the goods and services produced by an economy. Regardless of the type of economic system, factors of production must increase in order to achieve economic growth. Among such factors, capital is the most fundamental, especially when an economy is underdeveloped. The importance of capital becomes even greater for labor-abundant economies such as North and South Korea. The strategy for growth, therefore, is closely linked to the mobilization of capital. A government can raise internal or domestic capital by collecting taxes or issuing bonds. To obtain external or foreign capital, basically four alternatives exist: assistance, loans, foreign direct investment (FDI), and exports.

Relying on Assistance, 1950-1960

As the Korean War drew to a close, the North Korean economy was in dire straits. In addition to the distortion of the economic structure due to the division of the Peninsula in 1945, the damage from the war had a catastrophic effect. About 661,000 North Korean soldiers and 2.7 million civilians died or were injured, which means nearly 30 percent of the North Korean population suffered casualties during the war (Kihl 1988, 65). According to North Korea, about 700,000 houses, 5,000 schools, 1,000 hospitals, and about 40 percent of the total capacity of industrial production were destroyed. It is estimated that the per capita Gross National Product (GNP) in North Korea in 1953 was US$46 (Hwang 1993, 41-42).

As these figures imply, there was no internal capital for North Korea to try to mobilize. Furthermore, attracting foreign capital such as loans, FDI, and exports was virtually impossible because of North Korea’s deteriorated economic conditions, poor investment environment, and low credibility. Reliance on foreign assistance seemed the only option. Socialist countries rallied to North Korea’s side, and it received a substantial amount of grant-type assistance from these allies. In the 1953–1960 period, total assistance was US$1.43 billion, or about 20 percent of North Korea’s GNP, and in 1957–1960 outside countries contributed 82.1 percent of national investment for construction (Yeon 1986, 71). Thanks to this largesse, North Korea was able to achieve very fast economic growth...(Continued)