Memo from K. Koval to the CPSU CC, 'Concerning the main issues of the economic situation of the DPRK'

[CPSU CC stamp:

18025

2 May 1956

Subject to return to the

CPSU General Department]

Secret

[logo of the Main Directorate

for Matters of Economic Relations

with Countries of People's Democracy]

[date left blank] April 1956 to the CPSU CC

to Cde. L. I. BREZHNEV

In accordance with your instructions I submit a memo concerning the main issues of the economic situation of the Democratic People's Republic of Korea and about the aid of the USSR, China, and other countries of people's democracy in the revival of the DPRK economy.

[signature]

K. Koval'

[handwritten:

to the archives

The material was used in connection with a trip by a CPSU delegation to the 3^rd congress of the Korean Worker’s Party.

I. Shcherbakov

23 July 1956

V. Gorbunov

25 July 1956

[illegible signature]

Secret

Copy Nº [left blank]

MEMO

concerning the main issues of the economic situation of the Democratic People's Republic of Korea

Considerable successes were achieved in the development of the economy in North Korea during the period of peaceful construction, from 1945 to 1950. The democratic reforms carried out created broad opportunities to develop productive forces and rapidly improve the country's economy.

The most important of the democratic reforms was the land reform carried out in 1946, as a result of which more than 700,000 landless peasants in North Korea and those with little land received more than one million hectares of land from the state free of cost.

Another important democratic reform in North Korea was the nationalization of industrial enterprises, transportation, means of communications, banks, large irrigation, and other structures belonging to the Japanese and national traitors.

During the first five years of peaceful economic construction the Korean people achieved great successes in all spheres of the economy and culture. In 1949 the 1944 level in the production of a number of industrial products was reached and surpassed: copper - 129%, lead - 113%, zinc - 147.6%, silver - 204%, bean oil - 166%, cotton cloth - 938%, silk - 854%, salt production - 200%, etc.

The war which began in 1950 interrupted the peaceful creative work of the workers of North Korea. The damage caused to the DPRK economy by the war exceeded 420 billion won. More than 8,700 factory buildings, 600,000 residential buildings, more than 5,000 schools, about a thousand hospitals and clinics, 263 theaters and movie theaters, and thousands of other cultural and public service institutions were ruined in the course of the war.

Great damage was caused to agriculture, transportation, and other sectors of the country's economy.

In April 1954 the 7^th session of the DPRK Supreme People's Assembly adopted a three-year plan to revive and develop the DPRK economy between 1954 and 1956.

The three-year plan to revive and develop the economy of the Democratic People's Republic of Korea between 1954 and 1956 provided for restoring and exceeding the prewar 1949 level in gross industrial production by approximately one and a half times as a whole, and doubling the production of consumer goods.

It was intended to increase the gross harvest of grains in 1956 by approximately 19% compared with 1949, including rice by 31%; it was intended to restore the prewar total head of cattle to 88% in 1956.

The three-year plan provided for the creation of the necessary conditions to abolish rationed supply and to move to free trade in all food and industrial goods on the basis of an increase of industrial and agricultural production and the development of state and cooperative trade.

The aid given by the Soviet Union, China, and the countries of people's democracy has exceptionally great importance in the development of the DPRK economy.

A conclusion can be drawn on the basis of the results of the fulfillment of the plan for 1954-1955 that the three-year plan for the gross volume of the main kinds of industrial production will be over fulfilled. However, by virtue of the non-fulfillment of the plan for agricultural production the task of the three-year plan to prepare the conditions to abolish the ration card system and move to broad developed trade is not ensured.

The fulfillment of the three-year plan is described by the following data.

In the sphere of industry

Certain successes have been achieved in the two last years in the revival and development of DPRK industry.

Two hundred and ninety industrial enterprises have been repaired and newly-built. The gross state and cooperative industrial production of the DPRK in 1955 was 51.1 billion won, or 106.7% of the annual plan. Gross industrial production rose by 52% compared with 1954 was 156% of the 1949 level.

The production of the means of production rose by 32% compared to 1949. In some important types of industrial production the 1949 level was considerably exceeded in 1955: the extraction of zinc concentrates by 2.4 times, of lead concentrates by 3.8 times, the production of electric motors by 3.5 times, and of transformers by one and a half times.

However, in a number of kinds of industrial production the 1955 level of production was even considerably lower than 1949 and in the smelting of cast iron was 67%, of steel, 95%, for coal, 94%, of electrical energy, 53%, in the production of mineral fertilizer, 21%, in cement, 67%, and in copper, 69%.

The volume of the industrial production of consumer goods exceeded the 1949 level by 95%. The increase of the production of consumer goods was done mainly in the textile industry. In 1955 46.3 million meters of cotton fabric were produced, which was five times that of 1949.

However, the 1949 level of production has still not been achieved in the main consumer goods and the population's supply with consumer goods is extremely insufficient, which delays the development of trade turnover and measures to improve the population's standard of living.

In 1955 the volume of silk fabric production was 97% of the 1949 level, 50% in rubber footwear, 97% in vegetable oil, 83% in liquid soy, 44% in soap, and 96% in tobacco.

A considerable role in the production of consumer goods in the DPRK belongs to small and crafts industries. However, serious mistakes have been made in recent years with respect to private and craft industries. A course has been adopted of eliminating it; large taxes have been imposed on industrial enterprises, and they have not received the necessary raw materials and equipment. As a result the proportion of private and craft production in the output of industrial production has fallen from 12.2% in 1949 to 2.5% in 1954 and 1.1% in 1955, which has had a negative effect on the total volume of production of consumer goods.

A recommendation about the need to combine the development of large state industry with the growth of small and craft industry is still being unsatisfactorily implemented.

The level of equipment of state industrial sectors with machines and equipment has improved in the past year, and the skills of the workers and engineering and technical personnel have increased, as a consequence of which labor productivity has risen.

The prime cost of industrial production in 1955 dropped against 1954: in the mining industry by 21%, metallurgical by 9%, machinebuilding by 25%, chemical by 15%, and light industry by 13%. However, in the coal, cement, timber, and fishing sectors of industry the tasks to lower prime cost have not been fulfilled.

The capital investment plan for 1955 was 108.5% fulfilled and the volume of capital investment was 29.4 billion won, or 4.6 billion won more than in 1954; while this was done capital investment in industry rose by 49% compared to 1954 and was 15.3 billion won, and in agriculture by 91%, and was 3.02 billion won.

However, for a number of sites the capital construction plans were not fulfilled, which is explained by the lack of construction materials, the low degree of mechanization of the construction work, the lack of design estimate documentation, a shortage of skilled personnel, and the scattering of the workforce and material resources at numerous sites. The lack of a contract negotiation system in construction actually reduces the builders' responsibility for the timeframes and the quality of work, and leads to an increase in the cost of construction work.

At the beginning of 1956 the DPRK government carried out a number of measures to improve the situation in construction. In particular, beginning in 1956 the construction of large facilities will be done by special construction organizations and not in-house, as was done in 1955; a contract negotiation system for construction is being introduced and it is forbidden to build without design estimate documentation.

As a result of putting new industrial enterprises into operation and the repair [of old ones] the resources to produce the main types of production have risen in a year as follows:

In 1956 it is proposed to spend 56.6 billion won from the budget and the resources of enterprises for financing the economy. Of this, 25.3 billion won is being budgeted for the development of heavy industry, including 20.1 billion won from the budget and 5.2 billion won from the resources of enterprises and economic organizations; for the financing of the sectors producing consumer goods, 7.6 billion won, including 4.6 billion won from the budget and three billion won from enterprises' and economic organizations' own resources.

It is proposed to budget 6.9 billion won for the development of agriculture in 1956, including 5.4 billion won from the budget and 1.5 billion won from enterprises' and economic organizations' own resources.

It needs to be noted that a [added by hand: fascination] with the construction of machinebuilding industrial enterprises is still taking place without taking real capabilities into consideration (the construction of tractor and ball-bearing plants is being planned and an expansion of the machine tool holdings to 20-25,000 tools), which is at odds with certain recommendations according to which primary attention ought to be concentrated on the development of the mining, metallurgical, energy, and chemical industries, and the development of machinebuilding should be tied to the possibilities of the delivery of equipment from the countries of the socialist camp.

Transportation

The total amount of shipments of freight in 1955 by all forms of DPRK transportation was 31,300,000 tons, or 110.2% of plan. The shipment of freight by rail, water, and automotive vehicles rose by 32.6% compared to 1954.

The largest share for freight shipments was taken by rail transport, 55.4%, and automotive, 28.5%; the share of water transportation was only 2.6% of shipments.

Passenger transportation in 1955 was 31,100,000 people by rail and 51,600,000 people by automobile transport.

In 1955 the DPRK railroad network increased by 136 km and its length was 5060 km, compared to 5789 km in 1949.

In the field of agriculture

The three-year plan is not fulfilled satisfactorily in the area of the revival and development of agriculture. The gross grain harvest in 1954 was 2,600,000 tons, or 90.1% of plan, and in 1955, 2,500,000 tons, or 82.2% of plan.

In December 1955 the DPRK government made a decision to lower the target of the three-year plan for agriculture in connection with the non-fulfillment of the plan for the development of agriculture for 1954-1955, and the gross grain harvest for 1956 was set at 2,700,000 tons instead of the 3,300,000 tons envisioned according to the three-year plan. The three-year plan for the development of animal husbandry was also not fulfilled, and was 84% of the annual plan fulfilled for cattle, and 55% for pigs.

For 1956 the target for cattle was set at 511,300 for cattle instead of the 694,100 head envisioned by the three-year plan, or 73.3%, and 603,300 pigs, instead of 934,000, or 64.6%.

The non-fulfillment of the plan for the gross grain harvest is a consequence of a reduction of 60,100 hectares of planted plots, or three percent, a lowering of the grain yield from 13.2 centners in 1949 to 12 centners in 1955, or by nine percent.

The main reasons for the incomplete working of cultivated land and the low yield are the shortage of mineral fertilizer, draft animals, farm implements, seeds, and also the neglect of seed-growing.

The shortage of draft animals is being made up by tractors to a considerable degree. There were 2,382 15-hp tractors in 1955. However, the tractors are being used insufficiently productively by virtue of the poor organization of the work and the limited nature of the cultivated land.

Along with this the mistakes made in the management of agriculture have had an extremely negative effect on the development of agriculture:

during the procurement of agricultural products in 1954 and the spring of 1955 the forage supply and even the seed materials were taken from a considerable number of peasants, as a result of which a reduction of livestock and the planting of poor-quality seeds occurred;

the decision of the DPRK government at the beginning of 1955 to prohibit the sale of the main agricultural products negatively influenced the peasants' interests in increasing the marketability of agricultural products. The existing shortcomings in the system of purchasing and contracting agricultural products also has a negative effect.

As of 1 January 1956 there were more than 12,000 agricultural production cooperatives in the DPRK which combine 513,000, or 49%, of the total number of peasant farms. The agricultural production cooperatives have 858,000 hectares, or 48%, of all the land being worked.

The economy of the agricultural cooperatives is still weak. As a rule, the cooperatives have little land and are not supplied with draft animals and farm implements.

According to data of a commission of the Korean Worker's Party CC, in 6,268 agricultural cooperatives surveyed in the autumn of 1955 the yield was somewhat higher compared to peasant farms in only 39% of the cooperatives; in 34% of the agricultural cooperatives the yield was maintained at the level of peasant farms, and in the rest it was lower.

As a result of the non-fulfillment of the three-year plan in the area of the development of agriculture the country's need for grain is not supplied by its own production. In 1954 grain imports were 130,000 tons, in 1955, 215,000 tons, and in 1956 it is expected to be 220,000 tons.

The cotton production plan was sharply under fulfilled. In 1949 the DPRK harvested 73,000 tons, in 1955, 6,800 tons, and 8,700 tons are planned in 1956 against the 43,300 contemplated in the three-year plan. As a result the annual imports of cotton are 10-12,000 tons.

The production capacity of light and the food industry sectors are being incompletely used by virtue of the lack of agricultural raw materials. For example, the soy production plants are 65% busy, the creameries 50%, and the flour mills, 50%.

In 1955 a number of measures directed at increasing the production of agricultural goods, the improvement of the material position of the working masses of the Korean countryside, and the administrative and organizational strengthening of the agricultural production cooperatives were implemented by the Korean Worker's Party CC and Government in connection with our recommendations in order to eliminate the backwardness of agriculture. Great attention was paid to restoring crop land, opening up virgin, and expanding irrigated land. In 1955 17,000 hectares of fallow and virgin land were opened up, and the area of irrigated fields was expanded by approximately 30,000 hectares. Much work was also done to protect the crop land from flooding when rivers overflow.

In 1955 agriculture received 121,000 tons of mineral fertilizer, or 2.3 times more than in 1954.

Twenty-nine machine rental stations [MPS] were newly-created and 1,570 (15-hp) tractors were sent to the countryside in 1955 in order to increase the level of mechanization of field work. By the end of 1955 the number of MPS's had been increased from 16 to 45 compared to 1954, or 2.8 times, and the tractors in them from 812 to 2,382, or 2.9 times.

One hundred and fifty-seven thousand tons of seeds and food were issued to peasants by way of aid and financial assistance of 1,200,000,000 won was given. Poor peasants and families of servicemen were released from the payment of arrears in the tax in kind and debts in food and seed loans which were not paid at the end of 1954.

Measures were also taken concerning the administrative and organizational strengthening of production cooperatives. Five thousand members of the Party and the union of democratic youth were sent to work in the countryside in 1955 in order to strengthen the agricultural production cooperatives. Cooperatives were also given material aid in the form of a grant of credits, and the setting of the tax rate for cooperatives 5% lower than for individual peasant farms.

The KWP CC and DPRK government have outlined a series of measures to increase the production of agricultural crops in 1956: capital investments in irrigation construction and the production of mineral fertilizer have been increased:

the area irrigated by the state irrigation network will be brought up to 260,000 hectares against 155,000 hectares in 1949, 16,000 hectares of virgin and fallow land will be opened up, the production of fertilizer was increased to 169,000 tons against 53,000 tons in 1954, and it is intended to bring the amount of tractor work to 650,000 hectares (in terms of cultivated land).

Issues of Domestic Trade and the Workers' Standard of Living

The needed increase of the population's standard of living is not being provided as a result of the non-fulfillment of the tasks of the three-year plan to develop agriculture and the insufficient volume of production of consumer goods, and conditions are not being created to abolish the ration card system of supplying the population with food and manufactured goods.

At the present time there exists a ration card system for the main food and manufactured goods. The allowances are low: manual laborers get 900-800 grams of grain a day, office workers get 700-600 grams, dependents, 500-300 grams. Only half of these norms are supplied in rice. The rest is millet, kaoliang, or corn. Those working are issued only vegetable oil, three kilograms a year, soy paste and soy sauce, seven kilograms each, and salt, 12 kilograms, and dependents, soy paste and soy sauce, five kilograms, and 12 kilograms of salt.

Ration cards for vegetable oil were not issued to manual laborers in 1955 because it was in short supply.

Regarding manufactured goods those working are supplied with the allowed amounts for cotton fabric of from 15 to 23 meters per year, hosiery articles from three to 12 pair, komusiny [rubber shoes] from two to six pair, and household soap, from 800 to 4,800 grams.

Manual laborers and the office workers of private enterprises, craftsmen, persons in the free professions, private traders, and businessmen are not given allowances at all, and workers of consumer cooperatives, local trade, and their dependents were removed from the rationed grain supply system beginning on 1 February 1956.

Trade at commercial prices exists along with the allowances. Prices in commercial trade are considerably higher than the regulated [prices]: for soy and salt, 1.5-2 times; for vegetable oil, 4.5 times; for fabrics, socks, and rubber shoes, 7.5 times and for grains, 20 times.

At the same time the sale of grains in commercial trade is also regulated by virtue of a shortage of funds. The main food goods sold on the market are more expensive than in commercial trade: corn, 23 times [more expensive], haricot beans, 29 times, kaoliang, 43 times, and rice, 36 times.

Manual laborers and office workers are forced to buy the necessary food and individual manufactured goods in the commercial network and at markets as a result of the incomplete supply of rationed supplies, which leads to a serious lowering of real wages.

The monthly wages of manual laborers and office workers are 800-2000 won, while the commercial price of cotton fabric is 300 won per meter, of a cotton shirt, 1300 won, of soybean oil, 400 won per kilogram, and rice, 120 won per kilogram.

The standard of living of the rural population is also relatively low. About 35% of peasant farms do not have bread until the new harvest and need aid from the state. About 60% of peasant farms do not have draft animals.

Private trade turnover was reduced from 27.7 billion won in 1954 to 9.8 billion in 1955 in connection with the restrictions on business owners carried out in the first half of 1955. State and cooperative trade did not compensate for this reduction of trade turnover and the total volume of retail sales fell form 72.2 billion won in 1954 to 60.2 billion won in 1955 in current prices.

The retail sales volume of state and cooperative trade in 1955 was 50.3 billion won and increased by 13% against 1954 in current prices, and in comparable prices, by 29%. While this was being done the sales of manufactured goods in the state and cooperative trading network dropped from 20.2 billion won in 1954 to 19.6 billion won in 1955. The sales of vegetable oil dropped especially sharply from 1,505 tons in 1954 to 674 tons in 1955. The sales of grain products shrank from 641,000 tons in 1954 to 631,000 tons in 1955 and of meat from 6,360 tons in 1954 to 3,783 tons in 1955.

Sales of manufactured goods in state and cooperative trade increased by 22% in a year, including of cotton fabric by 19%, silk fabrics by 9%, and of rubber shoes by 28%; the sale of meat declined by 27%.

The level of supply per person remains very low, both in food and in manufactured goods.

The sale of the main goods per capita of the DPRK population in state and cooperative trade is:

Finances

In 1955 the DPRK state budget was executed from an income of 97.9 billion won and expenses of 99.9 billion won, that is, with a deficit of two billion won.

The share of the DPRK's own resources increased the income of the 1955 budget and the share of income connected with the aid given by the USSR and countries of people's democracy was reduced, as it evident from the following data:

(in billions of won)

It is obvious from the data cited that the share of the DPRK's own income in the budget has increased from 65% in 1954 to 76% in 1955. A further strengthening of the DPRK's own income base is projected for 1956. An income of 87.6 billon won is planned, which includes income connected with foreign aid of 13.3 billion won and their own income of 74.3 billion won, or 85% of the budget's income.

The population's tax payments decreased in 1955 and constituted 9.8 billion won against 11.4 billion won in 1954, which is connected with the reduction of the income tax rates of manual laborers, office workers, and cooperated craftsmen, and also a reduction of the number of private businessmen and merchants.

The structure of the budget expenditures is evident from the following:

(in billions of won)

In 1955 the share of budget money directed at the financing of the economy increased substantially. At the time as the budget income increased by 10.8 billion won, expenditures for the financing of the economy increased by 16.9 billion won. In 1955 these expenditures were 61% of all expenditures against 54% in 1954. Accordingly, the share of expenditures for defense and management dropped. However, expenditures for defense are more than 20%, and expenditures for management are 6.2% of all budget expenditures.

The DPRK has significantly unused reserves of equipment and other commodity and material valuables above the norm, which were 7.6 billion won as of the beginning of 1956, including 4.0 billion won in manufactured goods and 2.5 billion won in commerce.

According to the draft 1956 budget expenditures of 85.0 billion won are envisioned, including 44.2 billion won for the financing of the economy against 60.8 billion won in 1955. The reduction of these expenditures is associated with the reduction of foreign aid while preserving the expenditures for defense at the 1955 level, 21 billion won.

The state of the currency circulation of the DPRK is characterized by the existence of a discrepancy between the money in circulation and the economic circulation. There was an excessive release of money into circulation during the war years, in connection with which there was 12.2 billion won in circulation at the start of 1956. In spite of the fact that in 1955 the amount of money in the DPRK dropped somewhat, the velocity of turnover of money in the DPRK was slowed and was 4.4 times per year with respect to retail trade turnover (in the PRC the analogous number is 12.8).

Foreign trade issues

DPRK foreign trade turnover in 1955 was 400 million rubles and grew by 82% compared to 1954. At the same time the share of the USSR in DPRK foreign trade turnover was 85.4%.

One hundred and sixty-three million rubles of goods were imported to the USSR and 178,700,000 rubles [of goods] were imported from the USSR. Thus, the DPRK negative foreign trade balance with the USSR was 15,700,000 rubles.

The main goods imported by the DPRK from the USSR in 1955 were: trucks - 1,599; tractors - 1,138; gasoline - 45,900 tons; oil and lubricants - 15,100 tons; ammonium sulfate - 21,600 tons; newsprint - 5,900 tons; wheat - 27,100 tons; wheat flour - 18,000 tons, and cotton fabrics, 8,000,000 meters.

Ores and concentrates take first place in DPRK exports to the USSR - 98,900,000 rubles (61% of exports) and non-ferrous and precious metals, about 43,000,000 rubles (26.4%), including 16,000 tons of lead and 3,670 tons of gold. Five thousand eight hundred tons of apples, 73 tons of raw silk, and other goods were also delivered to the USSR.