[News analysis] The marketization of North Korea

Posted on : 2019-02-17 15:42 KST Modified on : 2019-02-17 15:42 KST
Government policy under Kim Jong-un has largely driven the North’s economic transformation
A farmer fertilizing his fields in Sariwon
A farmer fertilizing his fields in Sariwon

“Markets are a stronghold and hotbed of capitalistic elements.”

That was the gist of a statement that former North Korean leader Kim Jong-il delivered on June 18, 2008, to the top managers of economic institutions in the Workers’ Party of Korea (WPK) and the North Korean government. The June 18 Statement, as it’s called, slammed the brakes on the marketization that had been spurred by measures for improving economic management taken on July 1, 2002, and by the official recognition given to general markets in 2003. The supreme leader’s remarks formalized “counter-reform measures” that had already been taken, such as the dismissal of Premier Pak Pong-ju in Apr. 2007 and market controls imposed on Oct. 2007.

“We will have to carry out research programs in order to improve our economic management method in our own way.”

These were the remarks made by Kim Jong-il’s son and successor Kim Jong-un (then first secretary of the National Defense Commission and now the head of the State Affairs Commission) on Dec. 28, 2011, immediately after Kim Jong-il’s funeral. Kim was speaking to a gathering of senior officials on the WPK Central Committee.

The keyword that Kim Jong-un employed after his father’s funeral was the “economy.” Kim didn’t mince any words in his remarks, known as the Dec. 28 Statement: “Whenever someone suggests we try doing something, other people cause trouble because they’re biased against using capitalistic economic management methods [. . .] Because people keep causing trouble, no plans are being made for our economic projects [. . .].”

“We have to create our own economic management method by referring to all of the economic management methods that are reputed to be the best in the world,” Kim emphasized. He was instructing his officials to learn from overseas examples.

“If we create and apply our own unique economic management method, we won’t even need to use the word ‘reform’ as other countries do,” Kim added.

Kim Jong-un effectively trashed his father’s economic guidance claiming that “markets are a hotbed of capitalism” on the very day of his father’s funeral. He also urged his officials to borrow everything that’s good from the outside world. This is reminiscent of Deng Xiaoping’s famous saying that it doesn’t matter if a cat is black or white, so long as it catches mice.

“We need to fully establish our own economic management method. We need to immediately implement the accountable management system for socialist companies.”

This was a passage of the comprehensive business report that Kim delivered during the 7th WPK Congress on May 6-7, 2016. Within four years and four months, the North Korean economic management method that Kim had ordered officials to research on the very day of his father’s funeral was officially promulgated as a policy with the highest authority.

 North Hwanghae Province
North Hwanghae Province
Farmers allowed to sell products on the market

During those four years and four months, many changes occurred – research and execution organizations were established inside the party and the cabinet, and revisions were made to a number of laws affecting companies, farms and trade. Most importantly, markets were brought within the pale of institutions and planning. One of the best examples was the expansion of the “agricultural index” and “company index.”

After cooperative farms meet the “production plan” defined by the management, they’re allowed to sell crops (their agricultural index) that they’ve chosen and grown independently on the market. Companies that have met their state-issued production quotas are also allowed to create products (their company index) in line with demand and sell them on the market. The wages, performance and assessment of the farms, factories and companies that undergird the “Juche self-reliance economy” are determined by the effectiveness of their market utilization.

In order to encourage more production, the “farmland responsibility system (FRS)” has been instituted in the agricultural sector, which basically reduces the work teams (the smallest production unit) to the scale of the family. Instead of being paid North Korean money, which is worthless, laborers are now being given crops as their wages. Farmers can then sell those crops on the market. Kim’s reference to “farm workers producing big yields” in his New Year’s address is a clear political symbol that he supports such changes. Factories and companies have been given “effective management rights,” and “unlimited payment of compensation” has been allowed, basically abolishing the cap on wages.

”Top-down” government policies driving “bottom-up” marketization

The North Korean economic management method doesn’t officially endorse a capitalistic market economy, as is signified by the modifying phrase “which has implemented Juche ideology.” For example, it’s still illegal to buy or sell food (as opposed to ordinary produce) in the markets. Furthermore, individual factories and companies are allowed to set prices based on market demand, but “liberalizing prices on a national level is strictly prohibited.”

Nevertheless, marketization is promoted by the policies aimed at stimulating production and increasing government revenues, which are the key goals of North Korea’s economic management method. Yang Mun-su, a professor at the University of North Korean Studies, and many other experts on the North Korean economy argue that “the biggest driver of North Korea’s marketization in the present phase is government policy” and that “the government has spearheaded and pushed forward marketization.” The “bottom-up marketization” that largely consists of enterprising individuals in the lower-middle class who support themselves in North Korea’s jangmadang (markets) is now being augmented by “top-down marketization.”

Ruling class benefits from marketization

Some experts have argued that “the greatest beneficiaries of marketization are the supreme leader and the ruling class.” According to surveys and research by Hong Min, director of the North Korea research office at the Korea Institute for National Unification (KINU), the market usage fee collected by the North Korean authorities from 404 general markets (as of Dec. 2016) amounted to US$70 million a year.

Defectors with experience in the markets say that these market usage fees are nothing compared to the cost of storing bicycles and belongings. The management office (which reports to the local people’s committee) collects market usage fees on a daily basis and bicycle and belongings storage fees on an hourly basis. When the bicycle and belongings storage fee is added to the market usage fee, it amounts to hundreds of millions of dollars in yearly revenue.

The proceeds from transactions both at general markets and also factories and companies, the profits earned by state-run enterprises, the service industry fees paid by restaurants and stores and the fees and duties paid by trading companies are quasi-taxes that the authorities assess on the market. The 2-3% fee on the use of electronic forms of payments, such as the Korea Card and the Narae Card, also flow into the state coffers. The mobile phone market—a monopoly industry for the state—brings in a particularly large amount of revenue. The number of mobile phones in North Korea has exploded over the past decade, increasing from 1,600 in 2008 to around 6 million today. All of this “market economy activity” has given Pyongyang an exhaustible supply of funds.

By Lee Je-hun, senior staff writer

Please direct comments or questions to [english@hani.co.kr]

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