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A Quick Look At North Korea From History To Taxes

(Source: www.forbes.com)

Earlier this week, the world turned its eyes to North Korea as President Trump met with the country’s leader, Kim Jong Un, in Singapore. Part of the fascination may be because so little is known about North Korea. Here’s a brief look at the country’s history, economy—and why the government claims its people don’t pay taxes.

Contrary to what many folks believe, the division between the Koreas didn’t happen as a result of the Korean War. The schism occurred years before that. In 1910, Japan moved into the Korean peninsula as part of its colonization efforts and ruled the country for decades. After Japan’s defeat in World War II, the United States and the then Soviet Union divvied the peninsula up into north and south factions. The divide was at 38 degrees north latitude, better known as the 38th parallel.

In 1948, the southern part of the peninsula, backed by the United States, became the Republic of Korea, more commonly called South Korea. The northern part of the peninsula, supported by the Soviets, became the Democratic People’s Republic of Korea (DPRK), more commonly called North Korea.

One problem remained: The new governments each believed that they should control the peninsula. North Korea jumped first, and in 1950 they invaded South Korea. The result was the Korean War, which lasted until 1953. Eventually, the two Koreas reached an agreement with borders that largely mirrored their previous stance along the 38th parallel (the two countries later agreed to pursue a peace accord as part of the Panmunjom Declaration signed in 2018).

After the war, North Korea was ruled by Kim Il Sung, the same leader that the Soviets had installed in the 1940s. Under Kim Il Sung, North Korea became increasingly isolated from the rest of the world. The government kept a tight leash on its people, restricting travel and press, and regulating the economy.

As part of the restructuring, in 1974, direct taxes such as income taxes were officially eliminated. The move wasn’t considered to be an economic decision since by that time the government already controlled much of the wealth. So why the strike? Outsiders considered it propaganda, believing that it was intended to demonstrate that the country could support its people. Indirect taxes and user fees, however, remain in place to this day.

Two things happened in the 1990s that would further shape North Korea: The collapse of the Soviet Union in 1991 and the death of Kim Il Sung in 1994. With China as its only real ally, North Korea’s economy and its position in the world was declining. Kim Il Sung’s successor, Kim Jong Il, responded initially by taking steps to strengthen the state, including building up the military. Eventually, however, the lack of economic opportunity was too much for the country to manage, and Kim Jong Il accepted financial and other aid from South Korea as part of the so-called “Sunshine Policy.”

Unfortunately, it wasn’t enough. In 2009, North Korea announced that it would redenominate its national currency, the won. With redenomination, the face value of the currency is changed, typically in response to inflation. In this case, the government limited available won that could be exchanged for new currency, causing a bit of a financial panic. The efforts didn’t stabilize the economy, which wasn’t surprising to those who considered it not so much response to inflation but an attempt by the government to control the markets and limit growth in the independent sector.

Things would take an even more sour turn when North Korea ramped up its nuclear efforts. The country withdrew from the Nuclear Non-Proliferation Treaty (NPT), causing concern in the west. Those fears escalated in 2013 after Kim Jong Il died and Kim Jong Un ascended to power. Kim Jong Un took steps to establish himself as the “supreme leader” of the country, reportedly offing his uncle and nominal regent, Jang Song Thaek. The following year, the United Nations published a report which claimed that “systematic, widespread and gross human rights violations have been and are being committed by the Democratic People’s Republic of Korea” and that “[i]n many instances, the violations found entailed crimes against humanity based on State policies.” (You can read the report, which downloads as a pdf, here.)

As Kim Jong Un consolidated power inside the country, he also boosted the profile of the military. That was most clearly demonstrated with increased efforts to build and test nuclear weapons, which drew the ire ofother countries, including the United States and its primary trading partner, China. That resulted in trade sanctions and resolutions from the United Nations Security Council, including those targeting the country’s foreign currency earnings.

Despite economic pressures, North Korea touts itself as the only tax-free country in the world (though rumors abound that could be changing). That’s because North Korea’s people typically still don’t pay direct taxes. However, there are still some taxes paid: The government just doesn’t call them taxes. Those taxes, which tend to be user fees and value-added-type taxes (similar to our sales taxes) make up 11.4% of the country’s gross domestic product (GDP), on par with countries such as Guatemala, Central African Republic and Bangladesh. Keep in mind that number is a little misleading, though, because it excludes earnings from state-operated enterprises.

As the country remains isolated, its economy remains largely unchanged. In 2015, the North Korea’s GDP purchasing power parity, or value of all final goods and services produced, was estimated to be $40 billion. To put that in perspective, the GDP purchasing power parity for the top three economies was:

  1. China: $23.1 trillion
  2. European Union: $20 trillion
  3. United States: $19.4 trillion

South Korea’s GDP purchasing power checks in at $2 trillion.

The per capita GDP in North Korea is estimated to be $1,700. According to a 2017 report on the State of Food Security and Nutrition in the World, 10.3 million people in the country—nearly half of the population—are undernourished, a problem that the World Food Program says has been triggered by weather-related droughts and “compounded by political and commercial isolation.” By comparison, the GDP per capita for the United States is $59,500.

Today, the Central Intelligence Agency fact book claims that North Korea has “one of the world’s most centrally directed and least open economies.” Trade remains restricted and the country “does not publish reliable National Income Accounts data.”

More Info: www.forbes.com

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