How Vietnam’s Transition Experience May be Helpful for North Korea Today

The recent visit of the DPRK’s Foreign Minister Ri Yong Ho to Hanoi and the announcement that Vietnam will host a second summit between US President Trump and DPRK leader Kim Jong Un on February 27-28 have rekindled interest in how Vietnam’s success story might have relevance for North Korea today. In the late 1980s, both countries faced poor-performing state-led economies, over-dependence on China, and the economic shock of sharp reductions in Soviet aid and trade. While economic crises gripped both countries, their strategic choices in response could not have been more different. Vietnam chose to embark on economic reforms, end its occupation of Cambodia, downsize its military, improve relations with the US, and open itself to the international community for aid, investment and trade. North Korea responded by adopting isolationist, self-reliant economic policies, seeking improved inter-Korean relations, increasing military tensions by pursuing a nuclear weapons program and a confrontational policy toward the US, and appealing for humanitarian assistance from the international community in the face of economic collapse and a growing famine.

The trajectories of the two countries since the early 1990s illustrate the dramatic consequences of these strategies. For decades, the North Korean regime has grappled with the challenges of economic development, poverty reduction, social stability and maintenance of a communist political system, which should make the Vietnamese experience of significant interest as Kim Jong Un embarks on implementing the so-called new strategic line, prioritizing economic development.

Parallels Between Vietnam Then and North Korea Now

While the natural endowments, economic structures and demographics are very different between the two countries, there are several aspects of Vietnam’s early transition experience that seem relevant for North Korea today despite the gap in years. These include:

  • A high-level commitment to improving the economy;
  • Experimentation with reforms;
  • Seeking views of outsiders;
  • The challenge of shifting national security policy; and
  • The role of Southerners in the economy.

High-Level Commitment to Improving the Economy

In 1986, after a decade of economic stagnation and fears of high inflation, the Vietnamese leadership at the 6th Party Congress reached a consensus on a new path of economic renovation policy called Doi Moi. The loss of Soviet aid and trade as well as fears of over-dependence on China added to these domestic concerns and led to decisions to seek a new relationship with the US and open up the Vietnamese economy to the international community to gain access to advice, aid, investment and trade.

In his first New Year’s Address in 2012, Kim Jong Un emphasized improving the economic livelihood for all North Koreans and later made changes in the leadership’s decision-making structure to reflect this change. At the 2016 7th Party Congress, North Korea formally adopted a policy of giving equal weight to national security, emphasizing nuclear and missile capabilities and economic development.[1] In 2017, escalation of military tensions and deepening sanctions raised the specter of confrontation and economic crisis, declaring at the end of the year—after a high yield nuclear weapons test and a third ICBM flight test—that the country had achieved a credible nuclear weapons capabilities. Last year, Kim announced a shift of domestic priority to economic development while launching an intense diplomatic push to improve relations with the international community and broaden support for a new era of peace and economic cooperation.

Experimentation with Reforms

Even before the 1986 Party Congress, Vietnam experimented with small-scale economic reforms. These included grass-roots reforms in collectivized agriculture and a “fence-breaking” movement among state-owned enterprises that led to the acceptance of market elements in economic planning. Decentralization of decision-making was a key element in these experiments.

North Korea has also been willing to experiment with reforms under Kim Jong Un, notably in the Rason Special Economic Zone on the border with China and Russia. Also, in 2014, experimental reforms were introduced to reduce farm sizes, permit a share of production for household use and sale in markets, and give state-owned enterprise managers more discretion. Since 2016, these reforms have been expanded and greater emphasis has been placed on more decentralized decision-making. Markets were legalized in 2003, but ideological resistance to the role of markets in the economy has complicated economic development. Nonetheless, tolerance for the expansion and diversification of market-based activities has permitted greater economic experimentation, leading to an increase in the standard of living for many North Koreans as well as a rising middle class.

Seeking Views of Outsiders

Vietnam actively sought the views of foreigners on economic strategy and policy options starting with quiet informal consultations in the early years of Doi Moi. This was followed in the 1990s by both bilateral and multilateral consultations with donor governments and private investors. These consultations improved the quality of and foreign confidence in decision-making and fostered cooperative relationships with economic partners while the Vietnamese leadership retained ownership and control over the reform process.

North Korea has been reluctant to engage in high-level economic policy dialogue with foreign actors and is instead following a policy of “economic management in our own style.” Political tensions and sanctions have also discouraged these talks. Even so, lower-level officials and academics over the years have been actively engaged in economic learning, including in-country training and conferences, study tours abroad, overseas university programs in a number of countries, and active use of the internet to learn about international experiences and deepen knowledge of market economies. South Korean and Chinese experiences and cross-border partnerships have been a particularly important source of learning for North Korean officials. What has been missing is a role for the International Financial Institutions (IFIs), although North Korea was admitted in July 2014 as an Observer to the Asia/Pacific Group on Money Laundering of the OECD Financial Action Task Force.

Challenge of Shifting National Security Policy

Vietnam invaded Cambodia in 1978 and for a decade was denied access to international financial support even though it had become a member of the IMF and World Bank following unification in 1975. The decision in 1988 to exit Cambodia and downsize its large armed forces was a critical decision that both enabled a quiet rebuilding of relations with the US and renewed international support for economic engagement.

North Korea is at the cusp of crucial national security decisions that could have an equally transformative effect on its international relations and prospects for economic development. A critical issue is whether the outcome of ongoing US-DPRK negotiations will have a positive effect on North Korea’s future economic security and its political and economic relations with the US and international community. This is a more complicated challenge for North Korea than that faced by Vietnam, both because of the global importance of the nuclear issue and the need for stable future relations between the two Koreas and their two primary security supporters, the US and China.

Role of Southerners in the Economy

In shaping and implementing the Doi Moi policy, the Vietnamese reached out to officials from the South of the country for economic management and leadership. Recognizing that historically the South had more practical experience with dynamic international trade and investment than the North, the Party leadership elevated two economic reformers Vo Van Kiet and Phan Van Khai, who played particularly important roles as Prime Minister and Deputy Prime Minister for the economy in the early 1990s.

The recent improvement in inter-Korean relations provides an opportunity for North Korea to benefit from South Korea’s economic management expertise as well as investment and trade. It is noteworthy that the Vice Premier for the economy, Ri Ryong Nam, met with visiting chaebol (Korean conglomerate) chiefs during the third inter-Korean summit in Pyongyang in September 2018 and was subsequently invited to attend a meeting on inter-Korean economic cooperation in Seoul. An important question for future inter-Korean economic cooperation is whether, in addition to aid, investment and trade, it will include policy dialogue and technical assistance, especially in fiscal and monetary management.

Lessons for North Korea’s Transition to Market Mechanisms and Sustained Growth

Despite the very real differences between the Vietnamese and North Korean economic conditions, political systems and geopolitical context for transformational policies, there are a number of lessons from the Vietnamese practical experience of reforming economic policies to embrace the role of markets, stimulate private initiative and transform international relations that could be valuable guidelines for adaption to the North Korean opportunity today.

Managed Change Versus Adaptive Change

While Vietnam struggled with ideological resistance to the transition to a market economy and role for a vibrant private sector, the high-level commitment to go down this road was important in guiding managed change rather than reacting to evolving realities on the ground, as is the case for North Korea today. Early successes in liberalization helped set the foundation for political support for Doi Moi and proactive change management.

Two important lessons for North Korea are to adopt reforms that increase productivity and economic growth and facilitate the shift from an adaptive to a managed process for transitioning to a market economy with support from the international community. Decentralization of decision-making, encouraging the role of women in market activities and innovation are important ingredients.

Institution Building: Legal and Financial Systems, Trade, And Macroeconomic Management

Vietnam gave high priority to creating the institutions for a market economy and seeking donor advice, technical assistance and capacity building. An important aspect was upgrading statistics needed for economic management as well as baseline assessments and surveys to guide policy analyses, investment planning and measurement of poverty reduction.

North Korea has so far given little attention to modernizing and publishing economic and financial statistics to meet international standards and to support a larger role for markets in a mixed economy. Some limited efforts have been made to establish the legal underpinnings of a modern financial system that will attract foreign direct investment, but these have not been effectively implemented and are not comprehensive.

State-Owned Enterprise (SOE) Reform

SOE reform has been a constant challenge to Vietnam’s transition. The initial focus was on making more disciplined Government financial support, leveling the playing field with the private sector and improving management efficiency. But there have been strong political and financial incentives to retain and favor SOEs that contribute to important national priorities, and joint ventures with foreign business partners have experienced complications in management relationships.

North Korea has given considerable attention to SOE reform beginning in 2002 and in the 2014 reforms which have recently accelerated. These focus on giving managers more flexibility, relaxing state directives at the enterprise level and allowing SOEs to participate in market transactions. There has been an increasingly blurred boundary between SOE and private business activity, especially with the emergence of a class of successful entrepreneurs in both SOEs and private ventures. Learning from the Vietnamese experience with SOE reform and how it changed relationships among SOEs, the private sector and foreign partners would be a fruitful area for collaboration with North Korea. Exploring options for enterprise organization models that would best support the North’s future economic development and relations with South Korea, China and potentially Japan is also an important topic for shaping future enterprise policies.

Reforming While Growing

An important feature of Vietnam’s experience was its ability to sustain a reform program. This was made easier by early and continued high economic growth, producing benefits that cushioned painful changes in the adjustment process. This growth resulted from policies that increased domestic productivity and improved the country’s ties with the outside world, which led to high levels of official development assistance (ODA), foreign direct investment and technical assistance.

North Korea’s economic reforms of 2002-2003 failed to increase productivity and led to high inflation and eventual political pushback. Sanctions and self-reliance policies have precluded significant ODA and foreign direct investment, except from China and, episodically, South Korea. North Korea would benefit from understanding the combination of policy choices and management of foreign relations that allowed the “reform with growth” process to take root while the country grappled with the challenges of reform and an evolving external economic environment. While the specifics of policies and priorities will be different from the Vietnamese experience, the question of what will have real traction is important to address.

Role of Economic Leadership and Core Agencies

Much of Vietnam’s success was due to organizational competence in policy making and implementation. The assignment of a Deputy Prime Minister for the economy ensured coordination and accountability across agencies and provided a focal point for policy discussions with the IFIs on the reform program, economic management and investment priorities. This was supplemented by working-level coordinating roles for the State Planning Commission (later the Ministry of Planning and Investment), State Bank and Ministry of Finance. The Foreign Ministry also played an important role in supporting donor coordination and the Office of Government ensured links with Party perspectives.

North Korea is making progress in establishing structures for economic policy and management coordination. It has given the Cabinet lead responsibility, appointed more technocrats to positions of policy influence, and established inter-agency committees to address priority concerns. Younger middle-level technocrats and academic researchers with some foreign training or travel are also helping to shape new economic thinking. As North Korea contemplates a more open engagement with foreign as well as domestic organizations and partners, learning from the Vietnamese experience would help avoid confusion and misunderstandings in building successful relationships and facilitate effective decision-making.

Role of International Financial Institutions (IFIs)

From 1988-1993, the IMF and World Bank provided training and policy advice before commencing lending operations. Although sanctions were still in place, tacit US support for an IFIs role helped build confidence in relationships and a foundation for an expanded role. The IFIs played a major role in policy dialogue and donor coordination that helped build confidence in the transition process domestically and internationally and form a shared agenda among development partners. Working-level relationships in project design and implementation with counterparts in many government agencies as well as coordination of activities with other donors, private investors and NGOs were also important once lending commenced.

North Korea explored relations with the IFIs in the late 1990s, expressing interest in training, technical assistance and funding without burdensome conditions. However, the authorities were reluctant to meet the transparency requirements and obligations of membership; and in any case, building a relationship was not politically feasible at that time. If Pyongyang’s negotiations with the US and South Korea proceed in a positive manner, Vietnam’s experience in collaborating with the IFIs could be an important contribution to building a new phase of international cooperation with North Korea, especially helping Pyongyang to build confidence and capacity in managing new economic challenges.

Trade and World Trade Organization (WTO)

Vietnam gave early and sustained attention to trade negotiations with ASEAN, the US and the WTO. It joined ASEAN in 1995, concluded a bilateral trade agreement with the US in 2000, and acceded to the WTO in 2007. The skill and expertise required in these negotiations were critical to achieving the long-term economic benefits of reform and economic integration in the international community.

Despite its self-reliance rhetoric, North Korea understands the need to have a more outward-oriented economy. Although sanctions are currently a major impediment to achieving this goal, the Vietnamese experience and commitment to going down the WTO road are an important topic for dialogue and area for technical assistance.

Obstacles and Opportunities

Vietnam’s successes and track record of reform and economic integration with the outside world merit attention in considering how to shape an agenda for North Korea’s economic future. Once sanctions on North Korea are relaxed, agreement on policies for managing reforms and economic development, coupled with a strategic decision to change course in national security policy and international relations, could help put the North Korean economy on a path of stable growth and economic integration. The absence of a coherent shared vision among stakeholder countries for how to engage in North Korea’s economic development presents an obstacle to successful negotiations with the outside world, but also an opportunity to shape a new phase of engagement and a sustainable development process.

Each of North Korea’s future economic partners have different national interests in their bilateral economic engagement strategies, and North Korea will need to navigate these differences in pursuing its own interests. North Korea should establish balanced relations with South Korea, China, Russia, Japan and partners outside Northeast Asia. Anchoring economic development and balanced external economic relations in a shared multilateral framework would provide the coherence and stability that North Korea will need to find its new place in the international community. The challenge will be forming a consensus on what that basic framework should look like. The Vietnamese experience is valuable because it could provide the North Korean leadership with a solid foundation for developing a coherent vision of the country’s economic future and a plan to achieve it.

  1. [1]

    The “byungjin” policy of giving equal weight to national security through nuclear and missile programs and economic development was first adopted on March 31, 2013, at a plenary session of the Central Committee of the Workers’ Party of Korea and then reaffirmed as state policy at the 7th Party Congress.

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