Experts see conflicting signs over economic overhaul under young leader Kim Jong-un


In July 2002, North Korea raised expectations of a change toward a market-oriented system with a set of bold macroeconomic experiments.

It eased the rigid command economy by dissolving the rationing scheme, allowing for street markets, increasing wages and prices and introducing incentives and graded compensation.

North Korea watchers were surprised to see its leaders professing “reform,” a term loathed in the isolated regime for generations. Optimists predicted the North would take the path of China and Vietnam.

Over the next 10 years, these hopes have faded as the initiative proved disastrous.

It failed to vitalize markets and improve productivity, ending up only hiking prices and aggravating the pains of its populace.

The government rolled back the initiative in the mid-2000s, curbing street markets and foreign imports. The North’s agriculture and industry still remain dilapidated and the people still rely on food handouts from outside.

Under the new leadership of Kim Jong-un, North Korea recently showed conflicting signs regarding its economic policy.

Optimism lingers that the young, Swiss-educated leader may start a moderate reform to revive the moribund economy and forestall any signs of destabilization.

However, analysts say any major shifts may be far fetched as the regime remains steadfast in its commitment to military buildup and nuclear programs, which raised tension and curtailed foreign investment and aid, blamed for the collapse of its previous reforms.

2002 reform

Despite its colossal failure, the 2002 project sowed a vital seed of change ― the market. Food and everyday goods are being briskly traded in private black markets across the communist state.

“Among the yet unexpected outcomes is an expansion of the ‘0private” economy, fueled by more vigorous market activities among residents,” said Dong Yong-seung, a North Korea specialist at Samsung Economic Research Institute in Seoul.

“It’s something beyond their intention. Whether the food problem has improved or not, it means that the market mechanism is taking a form that can be accepted into the public economy,” he told The Korea Herald.

The 2002 measures were designed to normalize the public sector economy but they have rather resulted in scaling up the private economy with markets as the central force.

“Despite the bipolarization of the economy, the consumer base has been widened in the unofficial sector,” Dong said.

The comprehensive “economic adjustment policy” was unveiled in July 2002 in a desperate move to fix the malfunctioning public sector based on the rationing system.

It envisaged a multitude of bold reforms ― a substantial rise in prices and wages, merit-based compensation, gradual reduction of its distribution scheme, shift in the price-fixing mechanism and greater autonomy of businesses.

The project came in the aftermath of the “Arduous March” in the late 1990s, during which at least 2 million North Koreans are believed to have died from hunger due to the bad weather, halt of Soviet aid and mismanagement of the economy.

As the famine paralyzed central economic planning, then leader Kim Jong-il tacitly allowed markets, while keeping a close watch on them to rein in spillovers.

The reclusive autocrat also sought to court foreign investors. He promoted trade with China and other countries and installed free economic zones in remote border regions.

Still the ultimate rescue came from the outside. South Korea’s “sunshine policy,” championed by two liberal presidents from 1998-2008, and extensive humanitarian aid from other countries, brought signs of recovery in Pyongyang starting in the early 2000s.

To keep up with monetary overhang from civilian markets, the North Korean government intentionally raised prices of everything from rice to fuel to industrial goods by more than 250 percent. The minimum wages shot up from 110 North Korean won a month to 2,000 won for factory workers and to 6,000 won for miners. The exchange rate jumped about 150 percent.

Growing market activity

Border towns in particular have become a hotspot for illicit trade of items ranging from foodstuffs and daily goods to high-tech gadgets, according to defectors and researchers.

The covert marketplaces not only help cope with the people’s bread and butter issues but also promote greater understanding of the outside world and their homeland’s deprivation, said Marcus Noland, deputy director and a senior fellow at the Peterson Institute for International Economics in Washington, D.C.
He wrote a book in 2011 with his colleague Stephan Haggard, “Witness to Transformation: Refugee insights into North Korea,” after interviewing 65 defectors in Thailand and South Korea.

“(In the book) we found that the regime’s basic narrative ― that all the country’s problems are due to hostile foreign forces ― is increasingly disbelieved and that more and more people hold the regime accountable for their situation,” Noland said via email.

“Furthermore, as markets have developed to deal with the pressing material needs of the North Korean people, these have become a location of social communication and, potentially, political organizing.

“We found that people involved in the market were more likely to have been arrested, more likely to hold negative views of the regime, and critically, more likely to have communicated those views to their peers,” he said.

Failure

Speculation and anticipation ensued over its possible transition toward a China-style market-based socialist economy, with people feeling like they had made a fortune overnight because of the currency reevaluation.

Yet the ambitious plan left little in the way of a legacy other than a swath of side effects including uncontainable inflation and sharp supply shortfalls.

“The drastically increased wages and prices at first guaranteed them greater purchasing power and helped deal with differences between state-marked prices and those at unofficial marketplaces. But over time it led to acute inflation, due to excess demand and speculative orders,” said Yang Un-chul, director of unification strategy studies at Sejong Institute.

It also lacked measures to boost agricultural output, the life blood of most of the 24 million North Koreans, said Kim Young-hoon, a research director at the state-run Korea Rural Economic Institute in Seoul.

“The policy barely had any impact from the very beginning, particularly on agriculture,” he told The Korea Herald.

“It wasn’t aimed at a much-needed raise in farming production and did not include any follow-up steps.”

The situation went further downhill when a currency reform failed in December 2009 after the government dished out too many bills to residents to soothe their discontent.

Its efforts to raise industrial output also hit a snag because mostly small-sized enterprises were short of electricity and raw materials.

Pak Nam-gi, former chief of the planning and finance bureau of the Workers’ Party, was reportedly executed amid a price spiral, acute food crunch and widening rich-poor gap.

As of June 14, a kilogram of rice cost 3,200 North Korean won (72 cents) in Pyongyang and 3,900 won in Hyesan, the country’s second largest city in the northernmost region, according to Daily NK, a specialized online news outlet.

That is up around 25 percent and 40 percent from less than two months ago.

Prices usually reflect wild price swings due to factors such as weather, state food rationing, Chinese imports and political events.

Political barriers

Meanwhile, experts point to political restraints that have long dragged on the North Korean economy.

In September 2002, Pyongyang drew international attention as it announced a plan to develop a special economic zone in the northeastern border city of Sinuiju, a major industrial city specialized in machinery, metalworking and textiles.

The new district was granted an autonomous, special administrative status with a Chinese-born Dutch businessman at the helm.

But its vision for a regional financial, trade and tourism hub soon lost momentum when the first governor nominee, Yang Bin, was arrested in China on charges of tax evasion and illegal lending.

Another political setback came in October that year following a visit to Pyongyang by then U.S. Assistant Secretary of State James Kelly, during which North Korean officials unveiled its new nuclear program based on highly enriched uranium.

The relations with Japan also worsened after the North came clean with the death of a Japanese national who was abducted by North Korean agents. Japan’s investment prospects fluttered away instantly amid public backlash back home and abroad.

The prior Najin-Sonbong Free Economic Zone has also lured only a few investors due to a lack of infrastructure, financial aid and other incentives, on top of geopolitical tensions with Tokyo and Beijing over nuclear programs.

The economic zone plan has fizzled out largely due to conflict between the limited open-door strategy in the designated areas and Pyongyang’s foreign policy, said Cho Myung-chul, a North Korean defector and lawmaker of the ruling Saenuri Party.

“The government’s overall pursuit of planned economy contrasted with market-oriented FEZs and hardline diplomatic policies prioritizing the communist system. It means that North Korea tried to draw outside investment at a time when the international community had almost no trust in the country,” he said in a 2007 report published by the state-run Korea Institute International Economic Policy.

Cho’s view is echoed by Yang at Sejong, who attributed the failure to the regime’s “hostile” nature toward markets that stem from its communist ideology.

“All the measures broke down because there were too many political obstacles to overcome in order to boost the economy,” he said in a recent report.

“Unless the North’s regime allows greater flexibility rather than price control, the poverty-stricken economy will unlikely be able to shake off the distorted demand-supply chain and foreign assistance.”

Future path

To consolidate the rationale behind the regime’s propaganda, Kim Jong-un must open up his cloistered country a little more and allow a sound market system, experts say. Economic reform is also a vital element to realize his aspiration for an “ideologically and militarily strong nation.”

Kim, thought to be in his late 20s, was named as successor in 2008 and took power in December following his father’s death. He reportedly spent his youth in Switzerland and was once an avid fan of basketball star Michael Jordan and listened to pop music, according to testimonies from his former schoolmates.

Six months on, the presumption prevails that the young leader will remain dedicated to his father’s agenda given the ruling elites’ firm grip on the status quo and fears that reform may push the regime to the brink of collapse.

However, signs of economic reform are surfacing, said Cheong Seong-chang, a senior researcher at Sejong, citing recent moves and remarks by Kim and his aides.

Kim has been making visits to theme parks, schools, foster care centers, an apartment construction site, children’s department store and socks factory as a severe drought squeezes the populace, according to the North’s state media.

Cheong also took notice of a rare interview the Associated Press had on Jan. 16 with Yang Hyong-sop, vice chairman of the Supreme People’s Assembly.

Yang, a member of the powerful politburo of the Workers’ Party, said that his new boss is studying cases of economic reform in other nations including China, envisaging a “knowledge-based” economy.

“In the past, it was utterly unthinkable for North Korea to publicly reveal to the Western press that its leader is studying the issue of economic reform, to which the leadership including Kim Jong-il had felt strong repugnance,” Cheong said at a forum in Seoul last week.

“During the Kim Jong-il era, it was a very dangerous thing for any power elite to mention reform or openness in public.”

Among other indications is the reinstatement of former vice prime minister Park Bong-ju in the core of the administration. Park had previously spearheaded economic reforms but was reportedly demoted in 2006 by military commanders who harbored a grudge against him.

A group of 20 financial policymakers and scholars have been receiving two-months training in Tianjin in northern China since late May with a focus on livening up free economic zones, Yonhap News reported Wednesday, citing an unnamed source.

“They know that reform and opening the door is the only way to solve the food crisis,” said Kim Young-hui, a North Korean defector and economic expert at the state-run Korea Finance Corp.

“I predict that the leader will undertake low-level reform, give greater autonomy to state firms and increase the number of special economic zones. It may fall short of Chinese-style market economy but he knows that he won’t be able to eradicate the problem otherwise.”

By Shin Hyon-hee (heeshin@heraldcorp.com)