Page 1 of 2 A chance for change in North Korea
By Georgy Toloraya
The spectacular advancement in the peace process during 2007 (the six-party
talks and the US-DPRK, or North Korea, talks as well as increasing North-South
cooperation), progress in solving the nuclear issue (at least partly) and in
normalization of the DPRK’s relations with the West bring to the fore the
question of the DPRK’s future course. Provided hostility diminishes and its
external security is guaranteed, will the country seize the chance to modernize
and prosper, integrating into today’s world?
The North Korean leadership seems to wish to use these opportunities, arguing
that since DPRK statehood and defense are now firmly established, now is the
time for economic progress. The joint New Year Editorial for 2008, a policy
statement issued by the government, for the first time stated that ''building
of an economic power'' is the priority while ''the objective
of our advance is a great, prosperous and powerful socialist country'' (with a
target date of 2012 – Kim Il Sung’s 100th anniversary). Might the introduction
of ''the people's-living-first policy '' principle [1] signal changes in the
economic management system to make it more market-oriented?
In considering North Korea’s possible reform and transformation, we cannot but
wonder how much the national specifics that have determined North Korean
socialist practices will count. If the country sooner or later moves to adapt
to the market, will the North Korean way of doing so again be unique? Anything
would be progress in comparison with the traditional Stalinist inefficient
economic system (conditionally acceptable only for the production of
armaments). But could progress be stopped on the way to a full market economy
and at what stage?
Does marketization necessarily mean that the North Korean variant of the
economic system would be similar to other, basically liberal and therefore
internationally accepted ones? I think the DPRK’s national interests are likely
rather to dictate that it adopt a ''state market system”, not unlike East Asian
''guided capitalist'' models of development, but still stressing national
uniqueness, ''self-reliance'' and ''socialist principles”. How should the world
react to possible attempts to wrap economic reforms in such juche clothing?
Of course these issues could be analyzed under the presumption of a politically
stable DPRK, whose sovereignty is challenged neither from the outside nor from
the inside, so that for years to come we will still be dealing with the same -
although gradually changing because of generational shift - ruling elite.
Preservation of the leadership would mean there would be no criticism of former
policies, including economic policies. The nomenklatura was brought up in the
''bosom of the Great Leader'' and many North Koreans may sincerely believe in juche
ideas (which have actually proved effective in assureing regime survival) and
socialist principles. After total economic collapse killed hundreds of
thousands without weakening the control of the economy by the same Pyongyang
leaders, those leaders probably believe that economic change can be manipulated
any way they wish.
Pyongyang still regards the economic innovations under way since the 1990s as
an instrument for survival, not a development strategy. Therefore, changes in
the economy are not yet bringing about system transformation. Yet could such a
transformation happen and in what manner?
N Korea's economic approaches and their results
The words ''reform'' and ''openness'' are still not acceptable to Pyongyang.
Kim Jong-il himself stated as much during his October 2007 talks with President
Roh Moo-hyun of South Korea. [2] Under the present leadership, any economic
reforms would most likely not be called such. They would take place in an
unpublicized manner and without discussion. A crucial issue for legitimization
of changes in the framework of North Korean ideology is this: how can the
process of change be explained from the point of view of traditional North
Korean theories, and to what extent would it be influenced by them?
In the eyes of the Pyongyang leadership, any economic policy should guarantee
sovereign economic decision-making and be independent of the outside world. It
should also preserve political stability. The DPRK rulers from the very start
proclaimed ''economic independence'' to be a key component of protecting
national sovereignty and the country’s security. [3] Obvious enough in a
postcolonial, war-torn economy, it was necessary to ''overcome the
one-sidedness'', but the actual course was soon altered to ''concentrating all
attention on guaranteeing self-sufficient development of the economy.'' [4]
That economic rationale was abandoned by the 1950s and the goals were
politicized. Kim Il Sung’s logic called for ''building a diversified economy so
as to produce domestically most of the products of heavy and light industry and
agricultural produce.'' [5]
The system of workforce mobilization was established in accordance with
Stalinist prescriptions: ''If we conduct political work properly, increase the
political consciousness of the masses, their revolutionary enthusiasm ...
regardless of the size of the economy there is plenty of room for its speedy
development.'' [7] The doors of the nation’s economy were closed to the extent
that North Korea came to resemble some of the world’s least-developed
countries, in which foreign trade equals about 10% of the gross national
product (GNP). [8]
Economic thinking has not changed much since then. The same theories are still
taught at universities (although with a small addition of ''bourgeois economic
theories'') and remain the guidelines for practical conceptualization. The DPRK
economy is still subordinate to the regime’s political purposes to the extent
that it has lost its own substantive function. [9]
Pyongyang
During a recent visit to Pyongyang the author was told that songun (priority
to the army) determines economic policy and that the military, being ''the
vanguard of economic construction”, can solve all the economic problems the
country faces by directly engaging in the economy now that DPRK defense and
statehood are on a firm footing. The position of ''priority of defense
industry'' was stressed again in the New Year Editorial. [10]
Economically speaking, the lack of savings and investment was and remains the
chief reason for North Korea’s economic malaise. If investment at the beginning
was funneled into industrial development at the expense of agriculture, [11] in
the period from the 1970 to the 1990s this source of growth was exhausted while
low-efficiency and over-diversified industries could not generate enough
savings. The sorry state of agriculture led to agricultural shortages, and no
funds were available to import food.
The DPRK’s economy entered a period of stagnation (and at times crisis) after
the initial industrialization phase was completed in the early 1970s, declining
in that decade and the 1980s. Remaining technically backward, it was plagued by
a lack of innovation, dependence on imported raw materials and fuel with no
possibility of generating financial resources to pay for them, degradation of
its capital stock (even compared with the USSR and Eastern European countries),
high costs and low quality of its industrial products. In the 1970s and 1980s
the country fell into a classic poverty trap, with economic growth insufficient
to replace deteriorating capital stock or invest in new technologies to
increase productivity. [12]
For continued economic growth, North Korea required external investment, but
this dried up by the beginning of the 1990s with the breakup of the USSR. The
North Korean centrally planned economy entered a downward spiral from which it
seemed it might never recover.
Much of the country’s industrial stock was lost in the 1990s. [13] Floods in
1995–96 made worse by extensive soil degradation and deforestation not only
caused damage (up to US$15 billion) but also resulted in a sharp decline in
agricultural output. [14] The famine that ensued resulted in the deaths of
hundreds of thousands of people [15] because no alternative to the state
production and distribution system existed. Humanitarian catastrophe led to the
breakup of the centrally planned command and distribution system - the arteries
of the economy. By the mid-1990s the epoch of the ''command economy'' actually
came to an end. [16]
Reports on recent microeconomic improvements do not imply any corresponding
macroeconomic trend. The structure of the GNP has changed because of the
virtual termination of a large part of industrial production while consumption
has grown somewhat with the help of individual production and trade as well as
foreign aid. But that does not constitute economic growth in the usual sense of
the word - at least not for internal production. Some positive figures
indicting consumption growth since the early 2000s are mostly attributable to
economic aid, chiefly from China, South Korea and international relief
organizations. In 2000-2004, as calculated by the Korea Institute for
International Economic Policy (KIEP), foreign economic assistance to North
Korea accounted for 90-100% of the yearly increase in GNP. [17]
The North Korean economy is still not working as an industrial economy. Only
macroeconomic reforms can take it out of its dead end.
Reform or tinkering
Since the beginning of its acute economic crisis, North Korea tried first to
overcome economic difficulties by relying on its own forces and limiting
changes to cosmetic ones. At first it attempted to restructure the economy by
depending on internal resources.
Beginning in the mid-1980s, the leadership toyed with the adoption of market
elements without changing the basics. These changes were prompted by the threat
of a gradual change in the country’s relations with Eastern Europe - from one
of cooperation to one based purely on commerce. Because North Korea needed to
create a profit-generating mechanism, most of its experiments in the 1980s and
early 1990s were related to the international sphere (joint ventures,
export-processing plants, foreign trade self-accounting companies). Kim Il Sung
initiated the adoption of a number of liberal laws aimed at attracting foreign
capital. [18] Nevertheless, inside the country both macroeconomics and
microeconomics were supposed to remain socialist, and any private activity or
uncontrolled trade was prohibited until the beginning of the crisis. Then, the
control system itself fell apart.
The economic history of the DPRK over the past two decades is the story of
missed opportunities rooted in the reluctance and inability of political
leaders to change the rules of the economic game in accordance with new
challenges. It is ironic that Marxist theory, which was the theoretical
foundation of North Korea’s economic system, found unexpected confirmation in
the DPRK in 1990s.
Among other things, Marxist theory says that the ''productive forces''
determine the ''relations of production''. The virtual disablement of North
Korea’s centralized industry made it necessary for the people to resort to
market-driven economic activity for survival - first, the simplest forms of
barter, then chaotic, money-mediated exchanges based not on the former central
distribution symbolic prices but on real cost proportions, often measured in
foreign currency. [19] This process was given tremendous - over-hyped -
attention in the West, where it was largely seen as signifying the introduction
of market principles that would eventually lead to the breakup of the North’s
centrally planned economic system and then (most interesting to observers) to
the collapse of the political regime.
However, the uncontrolled breakup of the command economic system does not
necessarily signal the birth of a capitalist market system. The economic
reality that started to emerge in the DPRK in the 1990s was a primitive
quasi-market division of labor with mostly horizontal ties on a regional basis.
No monetary system existed, and no macroeconomic policy too shape. In the
absence of leadership from above, it was unlikely that these processes could
lead to spontaneous emergence of a modern economic system. ''Productive
forces'', especially a modern industrial and postindustrial economy, cannot
develop on such a narrow basis unless further market-oriented policies are
implemented.
In the 1990s, however, Kim Jong-il was concerned more about his power then
anything else, and it was not possible for him to risk contradicting the
majority of hardliners in the country’s leadership as they tried to check
microeconomic changes. By the time he consolidated his power base, the economic
processes under way could no longer be ignored or dealt with exclusively by
bans and persecution, which were anyway impossible because of the magnitude of
these ''deviations from socialism''.
Kim Jong-il seemed to understand the need for internal economic reforms.
According to a Kyodo Tsushin report of December 19, 1996, he spoke about
it that month while visiting China, where microeconomic issues were high on the
agenda. This China experience was seen in Pyongyang as not quite relevant,
however, owing to the different political situations in the two countries and
the different economic realities - China started introducing market reforms in
the agricultural sector with the ''household contract system'' but in North
Korea agriculture has limited potential.
However, embracing the new market-influenced economic reality proved
controversial and the initial efforts naive. Take for example the much-lauded
so-called government measures of July 2002. Pyongyang, whose position
vis-à-vis the West had considerably improved in 2000–2002, probably hoped
these changes would prompt its neighbors (especially Japan and South Korea) to
increase economic and financial aid, thereby helping increase consumer supply
and reinvigorating production on a more realistic commodity exchange basis
using the new flexible price and currency system.
North Korean products
The goal, however, was not to change the principles but only the methods of
economic control. The official explanations remained totally anti-market. In
interviews with this author, high-ranking North Korean economists made the
point that, although the ''previous price system'' followed the example of the
USSR, where costs for production of basic industrial goods - coal and iron -
were taken as a scale for the whole price system, the new DPRK system took the
price of rice as its basic equivalent.
The increase in wages (much lower than the increase in prices) was based on
calculation of a ''consumption basket'' reflecting fixed official prices. It is
true that microeconomic decision-making was liberalized and in many cases
directors of plants were given freedom to use state property in ways they
considered most efficient. They were allowed to do this because central
authorities relieved themselves of responsibility over ''local industry''
enterprises, allowing them to solve their problems themselves. However, most
were not very successful. Enterprises received access to foreign markets,
mostly to get foreign currency in any form possible, but strategic items such
as electricity, coal and products with direct relevance to defense were still
centrally controlled, which limited the ability of enterprises to be
competitive. [22]
The ''measures'' of 2002 were not perceived in Pyongyang as true reforms, nor
were they even seen as a ''first step'' in reform. They were not based on a
long-term vision and in fact were not part of any master plan with an inner
logic and sequence. Therefore the half-heartedness and controversial character
of the measures soon became obvious.
Marketization and its consequences
The changes in recent years remained mostly spontaneous, and the 2002 reforms
only opened the floodgates to market forces. This is significant because,
regardless of the intentions of DPRK leaders, the logic of the process called
for more changes. The economy actually changed from centrally planned to
multi-sectoral, combining the state sector (largely inoperational, except for
the military which is quite separate and in fact a ''state within the state''),
the capitalist sector (joint ventures and trading companies, free economic
zones), the semiprivate sector (especially in agriculture and services), and
the shadow (criminalized) sector. [23] The testimony to this is plentiful and
visible. Beginning in the early 1990s, markets greatly increased in numbers and
size. They now number approximately 500 around the country and about 20 in
Pyongyang alone.
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