The focus of international efforts in
North Korea used to be on food aid until a
government policy change this fall. Now that the
North Korean regime has sent home humanitarian
non-governmental organizations and reinforced the
public food distribution system, outside attention
has shifted to developmental assistance.
However, the basic question remains the
same: will international support improve the
situation in North Korea or just prop up the
regime? It will probably do
both, partly because North Korea and the regime
are are not easily separable. But are there any
visible developments that would justify taking the
pain of further outside engagement?
Thinking that the past years went by
without any significant economic change in North
Korea would mean ignoring reality.
Walking
through an extraordinary, festive Pyongyang in
October - freely, without any guide - I found a
handwritten poster (in Korean) at a watch store
reading, "To celebrate the important holiday [60th
anniversary of the foundation of the Korean
Workers' Party], we are selling many goods at a
10% discount from October 10 until October 31."
In other words, there was a sale - in
North Korea. Better than any official
announcements, this tells a whole story. In an
ordinary socialist shop, from the perspective of
the employees, selling means the investment of
time without any revenue. Neither their income nor
job security are usually connected to sales
figures. Those familiar with other socialist
countries will recall the lack of staff enthusiasm
and customer orientation in shops and restaurants.
Selling more than the plan dictates could even
invite trouble because of empty inventory.
Prices are usually fixed by the state and
not negotiable; a socialist store in fact does not
sell, it distributes. In such an environment,
attracting buyers by giving a discount makes no
sense at all. Having a sale implies an interest in
selling, as well as price flexibility. It implies
an interest in the customers, and hence the
readiness to respond to their needs. The
motivation surely is money; at least the manager
of the store has a vested interest in raising the
sales figures. A sale in North Korea? Can this be
a harbinger of the start of a paradigm shift?
Despite all skepticism vis-a-vis the reforms,
monetization and marketization seem to be no empty
words.
A few steps later, I saw an
advertisement offering coffee, tea, "fresh beer"
and a cozy place to play Korean chess (again, in
Korean - ie, targeting domestic customers). So
far, so good, but this was a clothing store.
Obviously not allowed to turn into a restaurant,
its staff were at least trying to extend its
reach. Near my hotel I found an advertisement for
"the first debit card in our country", issued by
the North East Asia Bank.
Currently, it
can only be used in roughly a dozen shops and
restaurants. Still, this is a beginning. Some
traders were ready to bargain, which implies
private economic activity or at least growing
flexibility. In one small but nicely arranged
shop, not in the vicinity of a hotel, I found
Chanel handbags at a very reasonable price, tags
written in Korean but with prices also in US
dollars. The same currency, not the euro, is
required to purchase a ticket at the Air Koryo
(the North's state airline) office in Beijing. A
North Korean official asked me to send him
English-language economics textbooks for his
daughter who studies at Kim Il-sung University,
and would not mind if I sent him the books via
ordinary mail. This list of examples can be
continued.
Beyond this anecdotal but
significant evidence, there are other
developments. For the second year in a row, North
Korean agriculture was able to increase its output
significantly (Yonhap News, "USDA Estimates North
Korea's Grain Output as Largest in 10 Years",
November 28). Analysts were quick to discard the
idea that the famine of 1995-1997 was mainly
caused by natural disasters; so it would be unfair
to associate the positive development this time
only to good weather. The attempts to utilize
market incentives to increase production have been
effective, although not without unexpected side
effects.
In China and Vietnam, too,
initially nobody wanted to change the whole
economic system. Even in the 1990s, Chinese
economists were talking about a secondary and
supplementary role of the non-state sector. But
successful experiments prompted new ones, leading
to the stop-and-go piecemeal approach that we now,
in hindsight, recognize to have been the
beginnings of gradual transformation. The external
situation was more favorable there also. So there
is room for optimism concerning North Korea. A
huge and important difference between the North
Korean case and that of China and Vietnam is the
weight of agriculture in the national economy and
in society. About 80% of the population in Vietnam
and 70% of the population in China worked in
agriculture at the start of the reform process, as
opposed to only about 30% in North Korea.
Liberalizing food trade in a non-saturated and
isolated market implies rising food prices. This
is good for food producers, but may signal rising
prices for consumers. In China and Vietnam in
1979, a majority benefited, while only a minority
was forced to bear heavier costs in exchange for
diversified supplies, and hence could be supported
by state subsidies.
Because of its
different socio-economic structure, in North Korea
it has been the other way round. The majority of
the population had to use their few and mostly
static resources to struggle for food in the
market and this drove up prices as well as
industrial wages. Accordingly, inflation in North
Korea skyrocketed, while it was much more moderate
in the early reform phase in the other two
countries.
"Skyrocketing inflation" is not
just an empty phrase. Due to the lack of data,
there is so far no reliable way to calculate a
North Korean inflation rate based on the standard
method of creating a basket of basic goods and
services. But the development of wages should
provide us with important clues, assuming that
wages must at least cover subsistence. Otherwise,
nobody would go to work. I asked a worker at a
cable factory in Pyongyang in October about his
monthly wage, and he answered it was 30,000 won
(US$29). Would he tell a foreigner the truth?
The number he provided appears to be very
high, if compared to the official wages that have
been raised from about 100 won to roughly 3,000
won in 2002, and allegedly have only reluctantly
been paid. However, in addition to a few private
shops, I also entered several state-run department
stores in Pyongyang, in which goods are displayed
at official state prices. Some examples: a pair of
very basic sports shoes cost 10,000 won, a bar of
soap was 600 won, a wall clock cost 8,500 won.
This suggests the possibility that the worker was
telling the truth. Based on this evidence, if the
wages increased tenfold in three years, we can
estimate the annual rate of inflation in North
Korea to have been roughly about 215% since 2002.
If this is roughly accurate, the situation
is politically not sustainable. So in October, the
government put on the brakes, hoping to curb
inflation by taking its major source - food - out
of the market cycle. Will it work? That remains to
be seen. Are the reforms over? Is avoiding reform
the surest survival strategy for the elite in
Pyongyang? I would disagree with such a view. If
the whole world around North Korea moves - and it
certainly does - the riskiest course may be to
remain static. So, even if the preservation of the
status quo is the objective of the elite, in the
long run it must work actively to achieve that
goal. Strange as it may sound, reform is the only
way to avoid regime change. Kim Jong-il calls that
"adjusting to the new environment".
This
brings us back to the international community.
Assuming that domestic agricultural production is
still, despite the increases in the last years,
insufficient - does North Korea now "rely" on food
deliveries from China and South Korea? That would
be something revolutionary in its own right. If
true, it must mean that the North Koreans see no
alternative to reliance on Chinese and South
Korean food aid in the short run. But if history
is a guide, they will hardly bet their future on
it.
Rather, the intention seems to be to
repeat what in principle has already been done
after another major crisis. During the Korean War
until about 1953-54, Kim Il-sung asked his
"socialist brothers" mainly for conventional aid,
such as food, clothing, etc. Then, the items on
his wish list changed to support for
reconstruction and the delivery of machinery,
technology and even turnkey factories. Today, we
would call that developmental assistance. Of
course, the current situation is in many ways
different from the 1950s. Yet a similar pattern
may be unfolding.
So, what is the plan? In
perfect congruence with the spirit of
juche, (self-reliance) the North Koreans
now do what economist David Ricardo would and what
European experts including myself at economic
seminars in Pyongyang have told them for years:
ensure self-sustainability in food by increasing
industrial output, exporting it and using the
revenues to import food to supplement domestic
production.
Before 1990, the North Koreans
had the opportunity to engage in "politically
correct" trade with socialist partners, who, for
strategic reasons, often could not avoid buying
low-quality goods. Now, if they want to export,
the North Koreans have few alternatives to dealing
with capitalists. Even the highly cooperative
partners in South Korea are private companies that
will go bankrupt if they purchase worthless or
over-priced goods. North Korea's industry has no
choice but to become competitive.
The
logical consequence is the urgent need for
modernization, the introduction of advanced
technology, securing a stable energy supply, the
import of capital and the development of an
institutional and human resource capability to
interact on the international scene. This is
behind Pyongyang's focus on intensified economic
training measures for its officials, and the
background of the recent news about eased
regulations for direct investment in North Korea
(Hankook Ilbo newspaper, November 30). This is
even more so since normalization with Japan and
the expected financial support related to that
deal are not out of reach, though still too far
away.
The reforms are not necessarily
over; the leaders in Pyongyang might just have
adjusted their strategy. Rome was not built in a
day, and the risks are high from the perspective
of the North Korean leadership. International
support will continue to be an important and
effective policy, as it obviously was in the past,
although its nature might change and the impact
will not always be directly measurable. However,
it works. The few millions spent on projects in
North Korea are a low price for regional security
and improved living conditions.
Ruediger Frank is a Korea
specialist at the University of Vienna and
Distinguished Visiting Professor at Korea
University.
