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Adam Smith comes to North
Korea
By Jamie Miyazaki
While
North Korea's first tentative steps toward economic
liberalization have been cautiously lauded by the world,
the reality is that they have opened the way to further
disaster. Kim Jong-il's Perestroika a la Pyongyang has
given even more of his people the opportunity to find
the nutritional and aesthetic advantages of tree bark
and weeds, if they can be found.
Kim's first
tentative steps on the road to economic liberalization,
in July 2002, were taken by Westerners to mean that at
long last Pyongyang appeared to be coming into the
global fold. But, with inexperienced command-economy
satraps setting out on a new and untried path, they were
only setting the stage for continuing confusion and
crisis.
With rationing and shortages of most
products, having the necessary (government-set) amount
of money was no guarantee of acquiring goods. The
government's Price Distribution System (PDS) prices
failed to reflect goods' actual worth, thus undercutting
one of the most basic functions of money.
The July
2002 reforms ostensibly marked the Northern economy's
monetization. Prices jumped overnight and the North
Korean won was dramatically devalued to reflect market
prices. For a Stalinist nation this was radical economic
shock therapy akin to taking a page straight out of the
International Monetary Fund's market fundamentalist
books. To put this in perspective, the Chinese
government's first price reforms back in 1979 drove up
the nominal consumer retail price of rice by a hefty 25
percent. In North Korea, never one to do things by half,
it jumped by an incredible 55,000 percent.
|
Old government price (won,
pre-07/02) |
New government price (won,
post-07/02) |
Nominal %
increase |
| Consumer retail price - rice
(kg) |
0.08 |
44 |
55,000 |
| Rice procurement price for
farmers (kg) |
0.8 |
40 |
5,000 |
| Corn (kg) |
0.49 |
20 |
4,082 |
| Bus fare |
0.10 |
2.0 |
2,000 |
| Basic wages |
110 |
2,000 |
1,818 |
| Special
sector wages(Compared to original basic
wage) |
110 |
6,000 |
5,455 |
| Electricity (kilowatt
hours) |
0.035 |
1.85 |
143 |
| US$1 |
2.19 |
150 |
6,849 |
As shown above, not all prices increased
equally. Retail prices for rice, North Korea's most
basic foodstuff, were subject to the most dramatic
increase. Meanwhile the procurement price for rice went
up by a relatively modest 5,000 percent, reversing the
former differential between the two prices.
The
previous subsidy to consumers was effectively
terminated, and the government now makes a profit on all
rice sold to the public. Not a particularly magnanimous
move for an undernourished population, but certainly one
means of patching up the government's parlous finances,
especially considering the vast amounts spent on rice
subsidies.
However, such massive price rises
were impossible for the already impoverished average
North Korean to afford. There was not even enough won in
circulation at the time to absorb the massive
readjustment. Therefore, the government also raised the
average wage from 110 won to 2,000 won, but special
sectors such as coal miners, soldiers, government
officials and farmers jumped to 6,000 won. To top off
these massive adjustments, all enterprises were now
instructed to turn a profit and pay their own way while
the won-dollar exchange rate was readjusted to 150 won.
Government prices and the exchange rate did, at
that brief moment at least, appear to reflect their real
value more closely. Enterprises now had to grapple with
accounting concepts such as profit and loss. At first
glance, these were promising steps towards economic
liberalization. Unfortunately, the government apparently
didn't grasp other economic fundamentals. The middle of
a fiscal year isn't an opportune time to introduce such
sweeping reforms as it tends to play havoc in
calculating government budgets.
Moreover, the
concomitant wage and price increases do not solve the
fundamental monetary imbalance in the system. Instead,
they trigger a bout of hyper-inflation as the market
readjusts price and exchange rate levels, as the black
market promptly has. The black market value of the won
reportedly plummeted as low as 50,000 won. Prices in the
government sector though have remained stable.
Admittedly the Northern economy did grow by an
estimated 1.2 percent last year, according to the Bank
of (South) Korea's estimates. But this follows a
positive trend since 1999, and from a purely economic
liberalization perspective, these reforms have failed.
They have not provided a massive growth spurt. For the
moment, Pyongyang is continuing its fragile low-growth
trajectory. Moreover, there has been a substantial
erosion of the average North Korean's purchasing power,
with some 80 percent of their income now going to
purchase food, due to the reforms.
But it is
debatable whether the objective of last year's reforms
was actually to trigger any shift to a market economy.
If one compares the South's GDP (gross domestic product)
with the North's, then the case for market
liberalization on economic grounds is irrefutable, but
economic reform is not Kim Jong-il and his inner
circle's agenda. Their overarching long-term political
objective has always been regime survival, and within
North Korea the main mechanism for ensuring Kim's
primacy has been through controlling all aspects of life
and buying the support of strategically important
groups, like the military. Seen through this rubric
then, the price reforms of last year are actually very
successful.
As noted, certain sectors of the
North's work force received higher wage increases last
July than others. Like basic wage earners, special wage
earners' rice prices have jumped markedly (see table
below), but in view of the cost of the rice subsidy, a
big increase in price for all was unavoidable. What is
surprising is that special wage earners' purchasing
power has actually increased relative to other goods,
and their huge pay rise offsets the massive price jump
in rice. Unlike their basic wage counterparts, special
wage earners actually come out on top after the reforms;
the economic incentive to be loyal to the administration
has significantly increased.
|
Commodity |
New
price (won) |
Nominal % increase |
Real %
increase |
Basic
wage real % increase
|
Special wage real % increase |
|
Rice
(kg) |
44 |
55,000 |
+3,025 |
+1,008 |
+733
|
|
Corn
(kg) |
20 |
4,082 |
+225 |
-25 |
-47 |
|
Electricity (kilowatt hours) |
1.8 |
5,143 |
+283 |
-6 |
-33 |
|
Bus
fare |
2.0 |
2,000 |
+110 |
-63
|
-74
|
Moreover, when benchmarked against the
new official won/US$ exchange rate, this trend of a real
increase in the cost of rice but a decrease in the price
of other goods is also mirrored. However, the real
increase in rice is far smaller than in any other
category. For the average North Korean, who probably has
no access to hard currency, this is a moot point.
However, the Bank of (South) Korea estimates
that there is twice as much hard currency in circulation
as won in the North, mostly in the hands of the
political elite, so this has significantly insulated
them from the huge erosion of purchasing power due to
the reforms and played to their benefit.
Another
effect of the price reforms was to wipe out any won
holdings that normal North Koreans may have stashed
away. The only normal people likely to have significant
won holdings would have been black marketers or farmers
selling produce through markets, both constituencies
engaged in economic activity outside of state control.
The massive won devaluation was basically a
punitive strike on these economically subversive
elements. This view was further strengthened by
government moves last year outlawing the possession of
US dollars to undercut any hard currency reserves
traders may have accumulated and abolishing the
quasi-hard currency Blue Won (North Korean Foreign
Exchange Certificates) prior to the price reforms.
The narrowing of the price gap between
government procurement and retail prices was done
probably to counter profit making at farmer's markets
and increase the lure of selling to the state.
There was considerable anecdotal evidence to
suggest that large amounts of produce were being sold
via farmer's markets not the PDS prior to reforms.
Radically devalued won savings and an increase in rice
prices are powerful incentives for farmers to produce
more and sell to the government. They also reduce the
benefits of selling on the black market where
imprisonment remains a risk. Kim's previously iron grip
on the economy has thus been re-established.
Of
course the black market has responded to this by
increasing its prices. Rice has increased by around 50
percent, but this increase is actually comparatively
small when compared to the old government and black
market price gap and the 55,000 percent nominal
government price hike. To all intents and purposes, Kim
has succeeded in narrowing the gap between the
government and the black market.
The apparent
lack of a mechanism to periodically adjust government
prices further supports the notion that Kim is not
interested in meaningful economic liberalization. In all
likelihood, once massive disequilibrium between
government and black market prices returns he will
resort to arbitrary tinkering with the monetary system
to punish subversive elements, buy off important groups
and re-exert central government control over the
economy.
So how successful have last July's
price reforms been? In retrospect it seems unlikely that
July 2002's reforms were meant to mark a shift to market
economics, but rather, were crafted with the specific
agenda of solidifying socialist principles and cementing
Kim's rule. From this perspective, the price reforms
have been eminently successful. Unfortunately, the
important questions - whether North Korea can undertake
real economic reforms and the country's desire do so -
remain unanswered.
However, what the reforms
have once again highlighted is the deeply engrained
mentality of situational opportunism permeating all
aspects of North Korean policymaking.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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