Deciphering North Korean Economic Policy Intentions

The question of whether or not North Korea might openly pursue economic reform has been a focus of expert discussions for years. According to optimists, the DPRK’s masters could transform, or even “conventionalize,” the “Stalinist state” to become a “normal” country—if they retained power long enough to achieve reform and eventually change their belligerent foreign policy. However, liberalization associated with any reforms could undermine their power base.

Kim Jong Un speaks during the 7th Congress of the Workers' Party of Korea on May 7, 2016. (Photo: KCNA)
(Photo: KCNA)

While North Korea’s leaders might contemplate policy changes, the potential destabilizing impact of reform makes them unlikely to do so in the open. In fact, some signs suggest Pyongyang has begun to implement limited reforms beneath a guise of continuity, a gambit intended to obscure the structural changes now occurring throughout North Korean society.

Actions are Louder than Words

The first years of Kim Jong Un’s reign saw some new hints of economic liberalism, despite the new supreme leader’s consolidation of power by terror and other means. If his father’s government merely tolerated marketization (with periodic setbacks like the infamous 2009 currency reform), authorities under Kim Jong Un have resorted to more daring “economic experiments,” producing regulations that have relaxed restrictions on certain private activity and created room for some individual initiative. Such steps stoked hope that Kim would announce a new economic course at the 7th Party Congress in May, and observers were disappointed when he spoke about “building the powerful socialist state planned by the great leaders. … a nation, bearing the hallmarks of a power in all the fields of politics, military affairs, the economy, science and technology, and culture,” as well as “building an economic giant” in accordance with decades-old strategies.[2]

His only pronounced criticism of marketization at the Party Congress concerned “bourgeois liberalization and the line for reform and openness,” a clear reference to China that was intended primarily to assert the DPRK’s “spirit of independence.” This rhetoric, which included calls to “depend on own forces” and adhere to “our style socialism,” does not mean that North Korea will stop experimenting with “measures in economy.” He also stressed the importance of “cooperation with the friendly countries,” including attempts to attract foreign investment and expand exports, regardless of sanctions now in place. Though Kim unveiled no new initiatives at the Party Congress that reflect the growing influence of markets on the country’s economy,[3] there also was no indication of any decision that could slow or reverse the process of marketization now unfolding at the grassroots level.

Kim Jong Un may have wrapped plans for new socioeconomic approaches in old trappings. He draws constantly on the legacy of his grandfather, Kim Il Sung, on matters ranging from wardrobe choice to official terminology—the concept of “parallel economic and defense construction” policy that preceded “byungjin” dates back to 1964—and the five-year economic development strategy he unveiled at the 7th Party Congress outwardly resembles a return to directive planning, when the state controlled economic enterprises to the highest degree possible. In fact, North Korea has never moved to revive directive planning since abandoning it in the mid-1990s, and the new multiyear policy is no exception. Rather, it is a long-term economic strategy that resembles, to an extent, the dirigisme of successful Asian economies.[4]

A Transformation in Economic Management

The most important component of this strategy is Kim’s call to expand “our method of economic management,” though what seems to be implied is broadening the use of market mechanisms that augment the command economy. While these two economic forces have tended to co-exist in a peculiar manner in the past, the mobilization economy is increasingly giving way to a normal process of production and distribution.[5]

One of the management system’s most important, if underappreciated, elements is called the “responsibility system of socialist enterprises.”[6] North Korean economists explained to me that under the plan, industrial enterprises are now obliged to give the state only 20% to 50% of their output while securing raw materials and selling the balance in what is essentially a free market, using Korean won to carry out transactions with market-based prices. This system is now standard even for formal state-owned enterprises, while locally-responsible entities are even freer in their economic activity. Such a system probably also encourages real-sector investments by the “new rich” (donju).

Under the management scheme, North Koreans have prioritized the energy, light industry and agriculture sectors with a combination of state investment and market incentives. Electricity generation combines medium-sized power plants and small-scale generators with nontraditional sources, such as solar batteries. A prohibition on coal exports promises to improve heating and energy production.

What is really important for “marketization” is the practice since 2012 when local agricultural communities received more rights to produce and distribute food for ensuring self-sufficiency.

In an attempt to develop a “knowledge economy,” policymakers are paying more attention to technological and human resource development.

The system’s agent of control is supposed to be the Cabinet, which is expected to unify strategic planning and determine rules for the most important sectors. However, its degree of involvement varies across different parts of the economy. Electrical energy and other “natural monopolies” are mostly controlled by state agencies under Cabinet oversight, (with the exception of the defense industry, governed separately).[7] This division of responsibility makes it particularly notable that the Cabinet’s leader, Premier Pak Pong Ju, is now one of Kim Jong Un’s three deputies on the State Affairs Commission. His inclusion on the body reflects an apparent desire to elevate the status of economic governance.

North Korea is thus streamlining its macroeconomic management, or at least displaying an intention to do so. After the breakdown of the centrally planned economy in the 1990s, rival bureaucratic clans emerged and used their administrative resources to create business structures. In particular, the military establishment succeeded under the “songun” (military first) policy at grabbing commanding positions in many lucrative sectors (such as exports and imports), and a majority of its new holdings were unrelated to defense needs, which also received attention. Kim Jong Un has made clear that the government will no longer tolerate the military’s economic preeminence; his decision to change the official party line from songun to byungjin can be interpreted as a “demilitarization” of economic priorities.[8] At one recent meeting, North Koreans explained that restraining military expenditures was one aim of byungjin. At another recent meeting in Pyongyang in May, North Korean economists explained to me the underlying logic and implications of this change: the country has become a “strong power” in defense and ideology, and it now seeks the same success in developing its science and technology, its broader economy and a “civilized way of life.” While such lofty aims may sound like political pandering, they indicate that the government has at least shifted its official focus from the military to economic development since Kim Jong Un took power.[9]

The First Results and Problems

It remains to be seen to what extent the military and other groups will resist ceding their economic positions. We might see a redistribution of power and inside fighting, potentially forcing Kim Jong Un to play the role of supreme arbiter. In the future, government and semi-government business corporations will probably appear to develop major branches of the economy, while smaller areas of business will be shared between state agencies at different levels and de facto private entrepreneurs. Meanwhile, the regime may act on its stated goal to curb corruption and illegal practices that it considers threats to society.

The results of economic liberalization have so far been quite noticeable, especially in Pyongyang. New industrial facilities for agriculture, food and textiles have increased the market availability of locally produced foodstuffs and semi-processed food, at least in Pyongyang shops. However, the success of certain classes and territories has further distinguished such pockets of affluence from the rest of society. The situation in some provincial areas remains depressed, and energy and transportation difficulties are far from being solved.

North Koreans will continue the careful search for their “own way” in economic policy by pursuing careful experiments and eliminating outdated elements of the planned economy. Their leaders understandably fear that any loud announcement of “reform”—which is and will probably remain a taboo word—could endanger morals, weaken central control and cause factional strife.

The country’s fundamental choice is whether to rely on directive planning or, alternately, market levers as a coordination mechanism. The regime must also confront the contradictory prerogatives of arbitrary political power and ownership protected by law. However, North Korea’s political absolutism and the external dangers it faces leave little space for any radical increase in economic freedom. Beneficiaries of political absolutism will continue to resist ceding power to the “invisible hand” of the free market, and their political “center” is likely to keep its grip on the major economic assets and resources. In coming years, if not decades, the government will probably stick to a conservative economic middle ground to preserve the existing political system and the power of Kim’s clan.

International sanctions may play significant roles—both negative and positive—in this process. They could limit the market sector access to foreign currency and other financial and material resources and negatively impact investment. Another danger is the possibility of the authorities trying to channel the privately-managed resources into mobilization-type economy. However, the leaders might be wise enough not to impede the activities of non-state sectorsand to overcome the hard times by giving more power to the market through sheer survival instinct. Thus, sanctions might become a blessing in disguise for further liberalizing the economy and unleashing the entrepreneurial spirit of North Koreans.

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[1] Both local and even central authorities closed their eyes on the spread of markets (with periodic setbacks, though), de facto “privatization of formally state-owned small and medium-sized enterprises through informal “leasing” and corruption, emergence of donju (rich individuals, engaged in informal financing), etc.

[2] “Supreme Leader Kim Jong Un’s Report to the Seventh Congress of the Workers’ Part of Korea on the Work of the Central Committee (Full Text),” KCNA, June 20, 2016, kcna.kp.

[3] North Korea now relies on an uneasy symbiosis of two systems: a “plan-less socialist” economy (Kim Byung Yeon) and a series of unregulated market economies.

[4] According to North Korean economic scholars, policymakers first tried a “branch” strategy based on an indicative planning. For example, the state developed and implemented yearly strategies in science and technology, the energy sector, agriculture and forestry. Drawing on past experience, it now seems to have applied indicative planning to develop a comprehensive five-year strategy for the core of economy.

[5] Kim visited sites representing a broad swath of the economy in recent months, and he closely monitored the “70-day battle” that preceded the Congress. Given the uneasiness that the mobilization campaign caused in parts of the population, he might have deemed the moment right to encourage party cadres across the country to change old ways.

[6] This resembles the system of “independent accountability,” or khozraschet, in the former Soviet Union.

[7]  “Supreme Leader Kim Jong Un’s Report to the Seventh Congress of the Workers’ Part of Korea on the Work of the Central Committee (Full Text),” KCNA, June 20, 2016, kcna.kp.

[8] The nuclear program at this stage probably demands fewer resources than a conventional arms buildup. Once the basic infrastructure has already been built, the state costs for labor—including wages for highly qualified personnel—are negligible, potentially representing no more than several percent of the national gross domestic product. Nonmonetary compensation in areas such as housing helps to reduce labor costs.

[9] Further, witness reports suggest that the country is now devoting less attention (and fewer resources) to conventional defense.

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