Page 2 of 2 A chance for change in North Korea
By Georgy Toloraya
''Shuttle merchants'' deliver merchandise from China in exchange for local
minerals and natural products, much as in Russia at an earlier period.
Foreign-currency shops increased in number and became the major source of
commodities for the middle class. People started small home-based production.
The service sector flourished, including restaurants, billiard parlors, karaoke
bars, rooms for rent carved out of personal living space, and repair services.
Quasi-banking services emerged and private lenders appeared. [24] All efforts
to check these developments through periodic campaigns were in vain.
Did the government intend to adapt its economic guidance system to these new
realities? Probably not. Personal interviews indicate that even the most
predictable negative by-products of
the 2002 measures were quite unexpected to the reformers. One such result was
spiraling inflation, with the won devaluing from the official 150 won to $1.00
to more than 3,000 won to the dollar at market rates within five years. This
factor alone severely undermined the state sector and the material situation of
those working for it. Social stratification became a major source of social
tension. Among those able to work, 30% are now unemployed. Although 70% of the
population of North Korea receives 250-380 grams of food per day, a new class
of affluent people has emerged. As in Russia, most members of the new, affluent
class are connected with the shadow sector, with semi-legal services, or they
capitalize on their official bureaucratic positions to gain profits. [25]
Unless checked, the criminalization of the economy could become a major concern
not only internally but also internationally (imagine North Korea becoming a
safe haven for the Asian underworld). Low-level corruption in North Korea is
already widespread, and (as happened in South Korea) it might become a serious
problem in the building of a modern transparent economy. Also, in Vietnam, to
which North Korea now seems to be looking for inspiration, growth is
attributable mostly to the inflow of foreign capital, and one of the
consequences has been rampant corruption.
Measures to curb the spread of capitalism were by and large designed to reduce
social tensions by giving a guaranteed minimum to the most underprivileged
layers of industrial workers and public servants, making state-sector
workplaces more attractive, and strengthening control over the population.
Controls on markets are said to have been tightened since Kim Jong-il’s 2007
summit meeting with President Roh and the resulting assurances of more help
from South Korea. Plans are rumored to exist to prohibit the sale of industrial
goods at the markets and to channel them all into state-run shops.
However can the clock be turned back? The introduction of market principles
into what was supposed to become the international market-oriented sector of
the economy became one of the leadership’s priorities. This process, which
started in the mid-1990s, included attempts to create joint ventures and
establish free economic zones as testing grounds for new policies. Most
significant was the attempt to start the Rajin-Sonbong special economic zone in
1997 based on the ''testament'' of the late Kim Il-sung. Although many of these
efforts were unsuccessful owing to North Korea’s isolation, the closed
character of its economy and the lack of trust in it, and the insufficient
experience and poor decision-making capabilities of North Korean ''business
people'', cooperation with South Korea turned out to be a major channel through
which to introduce capitalist management.
The Kaesong free economic zone, the Mt Kumgang tourist project, and the
upcoming Mt Paektu tourist project are examples. Recent agreements between the
prime ministers of North Korea and South Korea on developing Haeju, cargo
traffic, communications in the Kaesong zone and shipbuilding facilities in the
DPRK with South Korean assistance are encouraging as they broaden the scope of
the South Korea-sponsored market sector in the DPRK’s economy. (However, it
remains to be seen whether the Lee Myung-bak administration presents new
conditions for their implementation.)
As to whether this might mean that the ruling elite is ripe to embrace more
radical changes, at least there is now a window of opportunity that is affected
by a multitude of factors: military, political, economic, and personal.
The road ahead To start meaningful economic changes, North Korea obviously needs
comprehensive and irreversible security guarantees.
The main difference between the DPRK and, say, the People’s Republic of China
of the 1970s and 1980s or Vietnam since the 1990s is that when the PRC and
Vietnam started reforms their security was not seriously threatened. Now is a
crucial time as international hostility to the DPRK and its isolation has until
recently been the most important single factor preventing reform. A diplomatic
solution to guarantee North Korea’s national security would enable that part of
North Korea’s elites who understand the need for change to try modernization
measures without fear for their future.
It seems that the core of this ''new deal'' may be Korean nationalism. In
recent years the ''interests of the nation'' have been declared to be more
important than the interests of class or ideology. Today ''a great, prosperous
and powerful country'' [26] - kanson taeguk - not a socialist utopia is
more and more on the agenda.
The critical issue today still is this: will the leadership dare to embark on
comprehensive reform? It is not as monolithic on the subject as is usually
supposed. Kim Jong-il seems to have to listen to both ''pragmatists'' and
''conservatives'', which makes formulating a coherent policy extremely
difficult. So far, attempts toward that end have been less then successful, not
least because people with economic knowledge have very limited authority in
Pyongyang. The top leaders, many of whom formed their perspectives in guerrilla
warfare, still try to have their cake and eat it, too, by limiting changes to
an essential minimum. They might fear, however, that the logic of the changes
could prompt more changes, which would eventually get out of control. Thus, the
mission of the international academic efforts might well be to explain to North
Koreans their options.
Resolving the nuclear issue by providing security and economic assistance to
the DPRK could become a major factor as North Korea’s leaders make up their
minds on an economic model.
What are the possible scenarios? Setting aside regime change and the absorption
of the North by the South, one immediate scenario that cannot be ignored is
system conservation. A prolongation of the confrontational military-political
status quo or halfhearted security guarantees, especially if the nuclear deal
is not finalized under the current US administration, could prompt hard-liners
to try to freeze the reforms and eliminate the most obvious ''deviations from
socialist principles''. The system conservation experience during the 1990s
could be repeated under more favorable conditions now that Pyongyang feels its
immunity is guarded by its nuclear deterrent and it harbors hope for at least
some economic aid.
DPRK authorities are already trying to increase centralized control over the
state sector of the economy, to revitalize it, and at the same time to limit
the spread of market relations. The authorities decided to crack down on
markets recently, prohibit ''second jobs'' (trading) for employees of state
enterprises and ordered that ''any elements that undermine our system and
corrode our socialist morality and culture and our way of life'' not be
tolerated.
The government has been instructed to strengthen centralized control by
''concentrating all economic work in the Cabinet and organizing and carrying it
out under its unified command''. [27] A large part of the world community,
taking into account the not fully resolved issue of weapons of mass destruction
and military threats as well as the dangers that might be associated with a
North Korean collapse, might in such a case be prepared to pay a comparatively
small price for keeping the DPRK quiet and not causing problems. That would
mean finding at least some fixes to the North Korean economic crisis by simply
feeding the beast (even in the absence of meaningful changes in DPRK) to
minimize political and security risks.
In such a case, economic assistance would be based on the shopping lists
provided by North Koreans and would not do much to modernize the country.
Russia has already had this experience. Its economic assistance to North Korea
in the 1960s and 1970s sucked the USSR into a downward spiral of increasing
North Korea’s requests while being unable to help solve its long-term economic
problems. The above scenario really cannot be a long-term solution. Sooner or
later the DPRK will have to transform its economic theory and practices.
Otherwise it will collapse or, at best, fall further and further behind the
rest of humanity.
It can be assumed that because of political considerations the role of the
state in economic activities will remain much larger than in other classic
transitional countries at early stages of reform. Especially intriguing are Kim
Jong-il’s remarks, reported in the Korea Times of October 28, 2007, about his
intention to follow the Vietnam-style doi moi economic reform and
openness policy because of the supposition that the Vietnamese example is
closer to the needs of the DPRK than the Chinese one. The doi moi reforms,
because of the smaller size of the Vietnamese economy and its export
orientation based on cheap labor, would be more suitable for North Korea from
the point of view of preserving stability. The recent declaration of the
principle of ''ensuring the greatest possible profitability and the principle
of developing external economic relations …'' is especially interesting in this
context. [28]
North Koreans have also been known to study the South Korean experience. The
South Korean development model is quite relevant to North Korea in that, in the
1960s and 1970s, it was based on state planning, strong macroeconomic control,
introduction of foreign capital and export orientation, with big business
conglomerates as the driving force of economic growth. This model cannot be
imitated, but it can provide a reference for DPRK modernization.
The international community now has a unique opportunity to influence the
DPRK’s process of selection and implementation of economic policy. The long
history of developed countries’ aid to developing countries suggests that aid
can be futile, even counterproductive, in the absence of complementary reforms.
[29] Therefore, economic assistance to the DPRK as part of the package for the
solution of the nuclear problem should be aimed at assisting system
transformation, not at conservation of the outdated model by uncritically
satisfying North Korean requests.
A program to that effect, based on a desirable prognosis for North Korean
economic development, should be prepared jointly by prospective donors on a
coordinated basis in the framework of the six-party talks. It should of course
be acceptable to the DPRK authorities, but it should be made clear to them that
assistance will not be granted uncritically and automatically, but only in
accordance with the agreed strategy aimed at achieving the country’s
modernization and economic integration.
The critical issue, as the examples of other transit economies show, is
creating a class of proprietors and owners. In the DPRK, creeping privatization
is already happening - lots of foreign trade and production companies operate
in different areas of the country under the military, the party, local
government organs, and security services, and the party, military, and security
bureaucracies benefit from this system.
This process must be tacitly guided from the top (unlike in Russia, where it
was chaotic and controlled by rival factions and criminal circles). Privatizing
state property entities in bulk could in the long run result in the creation of
economic conglomerates resembling South Korea’s chaebol but with a
greater state role. This is already happening - quite large conglomerates are
emerging, such as Korea Pugang Corporation with capital around $20 million and
an average annual volume of business around $150 million. [30] They could be
welcome partners for South Korean investors and the engines of an export and
innovation drive. Such new economic entities that would depend on the foreign
markets for supply and sales would break the country’s isolation.
Structural priorities and the market
A modern economic structure has to be established. To integrate into the
international and regional division of labor, North Korea will have to rely on
the comparative advantages it possesses - cheap and comparatively well-educated
labor, mineral resources and location. The structure of the DPRK economy could
change tremendously. Russian researchers suggest that certain outdated
industries - especially machine building and the chemical industry - should be
liquidated, while others such as metallurgy should be rebuilt on a selective
basis. To solve the inevitable unemployment problem (which is already a fact of
life), the workforce should be retrained and employed at new productive
facilities. [31]
The modernization of the DPRK’s existing economic structure, with its heavy
reliance on industry, cannot be achieved solely by the invisible hand of the
market. Ideological reasons for protecting the nation’s sovereignty might
result in placing a high priority on inefficient branches, especially to the
military-industrial complex. North Korea’s modernization needs strong
government regulation of industry and a coherent structural policy supporting
priority industries in which the DPRK is internationally competitive.
Export-oriented growth is already undergoing a test in the Kaesong foreign
economic zone; it has had many difficulties, but they stem from the country’s
continuing isolation, not the concept itself. With wages much lower than in
China, North Korea could be a future site for South Korean and even Chinese
companies to relocate production of simple consumer goods, including textiles,
footwear, simple electronics, and household goods. Already Chinese and South
Korean capital compete in the North Korean economy and the ROK is determined to
take the lead. Shipbuilding and other capital- and raw material-intensive
industries could become areas of specialization. Information technologies and
outsourcing could also provide employment provided that limitations on the
export of dual-use technology are lifted as normalization proceeds.
Another sector that could survive international competition is natural
resources - the mining of ferrous and nonferrous metal ores (including
uranium); nonmetallic minerals; primary production of iron, steel, copper,
zinc, lead, and building materials (cement, magnesite); fisheries and forestry.
Traditional industries oriented toward the end user that have an immediate
stimulating effect on the consumption market should also be modernized and
helped out of stagnation. These include food processing, clothing, building
materials and similar activities. To make use of the country’s competitive
transit potential and its capacity to become a recreational and tourist
(especially eco-tourist) destination, the systems of transportation and
communication will have to be fundamentally rebuilt, including new roads and
railroads, ports, airports, communication facilities, and hotels.
Infrastructure projects should be developed on a non-commercial basis, probably
using official development assistance (ODA). DPRK entry to international
financial organizations will be important, although many difficulties remain to
be overcome.
Massive education and training programs for North Korea’s economic managers
should be put in place. These could start with distance education via the
Internet. Those in training would then not need to leave the country, making it
cheaper and, in the eyes of the DPRK leadership, protecting the trainees from
ideological contamination. Such training, which would be much more useful than
energy or food aid, could be the first joint action of multilateral economic
assistance to the DPRK. Armed with this knowledge, North Koreans could
formulate and implement the variant of the market economy best suited to the
specifics of the country and its geopolitical situation.
Georgy Toloraya is a visiting fellow at the Center for Northeast Asian
Policy Studies (CNAPS) at the Brookings Institution. He is by training a
diplomat specializing in East Asian affairs and has previously been posted in
North Korea, Seoul as deputy chief of mission, and Sydney as consul general. He
works part-time for the Institute of World Economy and International Relations
(IMEMO) in Moscow. Toloraya holds a PhD in Economics and is a Doctor of Economy
from Russian Academy of Science. He is a Professor of Moscow University of
International Relations.
Notes
[1] Rodong Shinmun, 1 January 2008 [2] Choson Ilbo, 4 October 2008 [3] Kim
Il-sung’s slogan was ''Our party’s line of building an independent national
economy is the embodiment of the juche idea in economic construction.'' See Kim
Il-sung, ''Answers to the Questions Raised by Foreign Correspondents''
(Pyongyang [Russian edition], 1974), p179. [4] Hwang Do Young, The Post-War
Reconstruction and Development of People’s Economy of DPRK, Moscow (Pyongyang:
Political Literature Publishing House, 1958), pp9–10. [5] Kim Il-sung, Selected
Works [English edition], vol. 3 (Pyongyang: Foreign Languages Publishing
House), p399. [6] Kim Il-sung, Selected Works [English edition], vol. 4
(Pyongyang: Foreign Languages Publishing House), p558. [7] Genaro Cheka, Rice
and Steel [Russian ed.] (Pyongyang: 1977), pp. 117–118. [8] Cooperation of
Russia with East Asian Countries in the 90s, (Moscow: Institute of
International Economic and Political Studies, 1999), pp122–23. [9] Russian
researchers argue that in the past the subordination of the economy was
justified by military-political circumstances, but now inertia rules; see I.
Bogdan, ''North Korean Economy in the Modern World,'' in Korean Peninsula:
Myths, Expectations and Reality, vol. 1 (Moscow: IFES, 2001), p53. [10] Rodong
Shinmun, 1 January 2008 [11] Kim Il-sung, in Selected Works, vol. 4, page 40,
argued: '' ... a formerly backward agrarian country like ours has no other way
but to draw a certain amount of funds for socialist industrialization from the
countryside.'' [12] Bradley O. Babson, ''Economic Perspectives on Future
Directions for Engagement with the DPRK in a Post-Test World,'' The Stanley
Foundation: Policy Analysis Brief (December 2006). [13] By early 1997, the
average production of major plants in North Korea was, according to optimistic
South Korean estimates, a mere 46 percent of capacity, while some Russian
experts presumed in 1998 that it was only 20–25 percent of capacity; see
Cooperation of Russia with East Asian Countries in the 90s, p. 122. [14]
Database, Humanitarian Development Resource Center for DPR Korea (HDRC), 2004.
[15] Some say up to 2 million, potentially 10% of the 1995 population (see
Marcus Noland, ''Famine and Reform in North Korea'' [working paper (WP 03-5),
Institute for International Economics, Washington, D.C., 2003, pp. 12–13], ;
also Sue Lautze, ''The Famine in North Korea: Humanitarian Responses in
Communist Nations'' (Tufts University, School of Nutrition Science and Policy,
Feinstein International Famine Center, June 1997), p10 [16] William Brown, in
''North Korea: How to Reform a Broken Economy,'' in North Korea: 2005 and
Beyond, ed. Philip Yun and Gi-Wook Shin (Stanford: Walter H. Shorenstein
Asia-Pacific Research Center; Washington, D.C., distributed by] Brookings
Institution Press, 2005, p64, observed that by 1996 or 1997 North Korea’s
economy, if not its political system, had indeed collapsed. An economy, by one
definition, is a social system that allows the specialization of labor. By the
late 1990s, specialization of labor had essentially ended for millions of
farmers and industrial workers. Hungry coal miners abandoned their mines and
scratched bark off trees to find something to eat while freezing farmers
abandoned their fields and combed the hillsides for heating fuel. Without the
''great leader'' or a central plan to tell them what to do, and with markets
and money strictly illegal, trade between coal miners and the farmers simply
stopped. [17] According to KIEP data released in September 2007, in 2004, GNP
in North Korea was estimated to have grown by the equivalent of $458 million,
while overall foreign aid was $419 million. [18] Legal changes included the
laws on free economic zones (8 April 1990), foreign investment (10 December
1992), foreign enterprises (10 December 1992), contract joint ventures (10
December 1994), foreign investment and commercial enterprises and individual
taxation of foreigners (8 April 1993), foreign currency regulations (8 April
1993), banks with foreign participation (10 December 1993), customs (10
December 1993), and foreign trade (March 1998). [19] M. Trigubenko, T. Neelova,
and G. Levchenko, ''Problems of Korean Peninsula,'' in Russian Diplomacy in
Korea in 1990s (Moscow: Institute of International Economic and Political
Studies, 2000), p15. [20] Georgy Bulychev, The Political Systems of the Korean
Peninsula States [in Russian] (Moscow: MGIMO Publishers, 2002), p95. [21]
Prices for food, fuel, and electricity rose 26-fold, on average, and prices for
rice rose 550-fold. Public transport fares increased by up to 20-fold. The new
rate of exchange for the DPRK won - 150 won to $1.00 - was introduced; the rate
was based on the world market price for rice in dollars. [22] ''Recent Changes
in North Korea'' (Seoul: Ministry of Unification, 2005). [23] T. Lezhenina,
East Asia: Tendencies, Contradictions, Conflicts (Moscow: Institute of
International Economic and Political Studies, 2001), pp. 193–95. [24] Andrei
Lankov, ''North Korea: De-Stalinization from Below and the Advent of New Social
Forces,'' Harvard Asia Quarterly vol. 9, no. 4 (Fall 2005). [25] Some estimates
suggest that approximately 150,000 state security service operatives use their
education, knowledge of how the state operates, and privileged access to
contacts and transportation to benefit from illegal operations, including
smuggling, customs evasion, and assistance to those illegally entering China;
see Hazel Smith, ''Brownback Bill Will Not Solve North Korea’s Problems,''
Jane’s Information Group, 21 January 2004. [26] Rodong shinmun, 1 January 2008.
[27] Ibid. [28] Ibid. [29] Stephan Haggard and Marcus Noland, ''Economic
Implications of Summit Agreement,'' Policy Forum Online 07-082A (San Francisco:
Nautilus Institute, 30 October 2007), [30] Daily North Korea. [31] The Problems
of Korean Peninsula and Russian Interests (Moscow: Institute of International
Economic and Political Studies, 1998), 21, p142.
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