Market Reforms with North Korean Characteristics: Loosening the Grip on State-Owned Enterprises
In the last few years, the seemingly ever more frequent North Korean nuclear and missile tests have been met with intensifying sanctions. Yet, North Korea’s economic recovery post-2000 has continued largely unabated. This is in part because the North Korean government has made radical changes in the management of its state-owned enterprises (SOEs). While the regime seems to be doing everything it can to keep up Stalinist appearances and Kim Jong Un probably believes that he cannot abandon socialist rhetoric without risking his legitimacy, in reality, markets increasingly play a central role in the lives of ordinary North Koreans. As such, the regime has been adapting to this new reality and moving to co-opt market forces by side-lining the Party in economic management. This is most clearly illustrated by the 2014 amended Enterprise Act, which came to light earlier this year, granting SOE managers broad rights to engage in foreign trade and joint ventures and accept investment from domestic private investors. Institutionalizing market forces seems to be helping to create a better investment climate, and thus spurring growth.
The Abolition of Party Control in Everyday Economic Life?
Under Kim Il Sung, North Korea had a hyper-centralized command economy. The centralization of control in the hands of the industrial ministries and the state planning committee was further augmented by the Taean Work System of industrial management introduced in 1961, which gave the enterprise Party committee ultimate power over day-to-day operational decisions. It was the Party secretary who was supposed to both play a lead role in enterprise work and closely supervise workers on the shop floor to encourage innovation and greater toil to achieve the Party’s aims.
Yet in Chapter 3 of the Enterprise Act (which concerns the management organs of enterprises), there are no references, as previously noted by the South Korean press, to the Taean Work System. Under the new system, the enterprise director occupies a position akin to a modern Chief Executive Officer; the chief engineer directs production and daily operations (essentially a Chief Operating Officer) and is supported by the deputy director. The Party committee is seemingly no longer part of factory management. A search of Rodong Sinmun online for the Taean Work System indicates that it is now just a part of the historic cult of Kim Il Sung. Indeed, Rodong Sinmun proclaimed in an article last year that the enterprise director is ‘master of management.’ Of course, directors must hold the ‘productive masses’ (workers) in their ‘hearts,’ but the Party secretary is no longer present and is not mentioned.
This has seemingly left the enterprise director in full charge of the daily operations of their enterprise. In the traditional system of central planning, this status conferred little more than the ability to haggle with the central bureaucracy over planning targets and raw materials. However, as discussed below, under the new system, management has been given broad autonomy in important areas such as foreign trade and investment, and the regime seems to have created the legal basis for private investment in state enterprises.
Autonomy in the act begins with the right of state and party organizations down to the local level to form enterprises. Under the command economy, the central government tried to monopolize the power to create enterprises and directly control the resources that they were allowed to use. Under the new system, even County People’s Committees (the lowest level of state government) are given the right to form enterprises.
Contrary to what some reports have implied, the planned economy has not been officially abolished, and remains formally in law. However, its role seems to be more symbolic and rhetorical, rather than functional. Under the old system, the central state would hand down targets that would be further disaggregated by a supervising agency(s), and the enterprise would then plan production in line with these targets. Under the new system, enterprises are obliged to make their own plans that ‘match their own circumstances’ in order to fulfill the ‘people’s economic plan’ (Article 31). The latter is still very much present in North Korean propaganda, but the actual control of the central government is far from clear. Indeed, there are only vague references to the ‘unified leadership of the cabinet,’ and other central and local institutions (Article 51).
At the same time, the law stresses the autonomy of enterprises in planning and in daily operations. Indeed, the law grants ‘actual management rights’ to enterprises, which include management of personnel, supplies and output (Articles 29-30). Of course, to keep up Stalinist appearances, the regime has also stressed in other publications that this reform is not ‘capitalist’ and is not based on experiences of ‘other countries.’
While the role (if any) of central planning in the new system is nebulous, the law is far more precise in matters of foreign trade and joint ventures (Article 37). Domestic enterprises have been granted the right to engage in foreign trade, and seek joint ventures with foreign partners—a radical change in economic policy. Under the old system, trade was centrally directed and controlled by the Ministry of Trade. This system began to break down in the mid-1970s and foreign trade companies under powerful Party, state and military organizations came to monopolize the flow of foreign currency and goods into and out of the country. The new law appears to have abolished this system.
Whether enterprises will be able to actually exercise such rights to trade and obtain foreign investment is far from clear. However, at least on paper, North Korea’s domestic enterprises are now allowed to engage in ‘foreign economic activities’ and even receive foreign investment capital; previously, most enterprises had no such rights. So this is indeed a radical change. Yet, the most radical change has been made in the financial management of enterprises prescribed in the act.
De Facto Recognition of Capital Markets
In North Korea, all banks are owned by the state and on paper there was, until very recently, no recognition of the existence of private capital as a source of investment. Indeed, markets are rarely discussed in the open-access media, or in the works of Kim Il Sung or Kim Jong Il.
However, since the famine, many sectors of the North Korean economy have become partially marketized. Even where markets and entrepreneurship are not visible on the surface, studies of North Korean markets confirm that many private companies are registered as ‘pseudo-state enterprises’ (PSEs).
The Enterprise Act does not directly recognize the existence of private capital, or the private entrepreneurial class (the so-called ‘Money Masters’ or ‘Tonju’ in Korean). Yet, the 2014 revision to the act explicitly allows enterprises to make use of ‘the unused cash of residents’ to finance their operations (Article 38). This was discovered in June by a South Korean journalist, and appears to legalize private investment in state enterprises. Previously, the cash holdings of the North Korean people were supposed to be placed in state banks before they could be given to state enterprises as grants or loans.
In the last two decades, the North Korean government has utilized a number of strategies to bring cash held by its people into the state economy. These include personal bank accounts (with debit cards like the Narae Card), savings accounts, and the confiscatory currency reform of 2009. Now the regime has decided to let its people invest directly in production, and thus seems to have de facto legalized ‘pseudo-state property.’ If this is true and if the regime does not renege on such commitments, North Korea’s economy could see an investment boom as more private investors feel free to create new, larger businesses, under the cover of the state. That said, without outside support, the necessary longer-term investments in infrastructure will probably not be possible due to a scarcity of funds.
A High Mountain to Climb
These changes to the SOE laws are the first steps on a long road to economic reform. Private property still is illegal, and the regime will need to figure out how to further expand the rights of de facto private business in order to ensure that recent economic growth is sustainable. Removing the Party, a bastion of the old socialist order, from daily economic life is clearly a step in the right direction, as it allows enterprise management and entrepreneurs to worry less about ideology. At the same time, the nuclear and missile programs mean that the foreign investment the country needs to grow and reconstruct its shattered infrastructure will likely not be forthcoming. These limited but real changes will likely run up against the hard realities that the regime’s foreign policy has created.
Like in the film “The Person Who Remains in My Heart,” viewable here in Korean: https://www.youtube.com/watch?v=uhZoC-pgBZo.
At the top level, this system of titles is a direct copy of the original Soviet enterprise system. See: Michael Ellman, “Seven theses on Kosyginism,” De Economist, March 1977, Volume 125, Issue 1, p. 32.
Like this one from 2016 written by a member of the economics faculty at Kim Il Sung University website: http://www.ryongnamsan.edu.kp/univ/success/social/part/814. I am grateful to Alek Sigley of Tongil Tours for pointing me in the direction of this.
See: Andrei Lankov, Peter Ward, Ho-yeol Yoo and Ji-young Kim, “Making Money in the State: North Korea’s Pseudo-State Enterprises in the early 2000s,” Journal of East Asian Studies, pp. 51-67.