Can Capitalism Take Off in North Korea?
Flirtations with capitalism need to overcome a rigid ideology.
North Korea has experienced slowly expanding spheres of capitalism for 20 years, including the recent decentralization of farming decisions down to the family level. This incongruous but enduring development has aroused hopes in South Korea that the North’s economy will somehow develop enough to mitigate the eventual unification costs for Seoul. The Hyundai Economic Research Institute published in 2014 a forecast that had the North growing at 7 percent a year for 10 years. Also, the Foreign Economic Policy Research Institute of Seoul National University reported that if the North were to adopt either the Chinese or Vietnamese model of reform it would raise the annual growth rate to 6-7 percent.
However, Pyongyang has merely flirted with capitalism, hoping the famed “animal spirits” will help animate a sick economy and perpetuate the Kim dynasty. Having inherited capitalism along with communism of the Juche type, Kim Jong-un has been doing his best to maximize the benefits of the former, but only within the confines of the latter.
Even before Pyongyang began playing with capitalist ideas, private enterprise appeared in North Korea during the historic famine of the 1990s, triggered by Biblical-scale floods that swept away numerous production sites and inundated underground grain-storages. In the ensuing years of famine from 1994 to 1998, the North Koreans began to trade their meager possessions for food in the countryside and on urban street corners. The government cleverly responded to the subsequent growth in private commerce by putting up market buildings at convenient locations and making stalls available for rent. Thus began the use of capitalism means for socialist ends. Some traders and new entrepreneurs opened restaurants, hair salons, and other upscale service outfits near the markets, or launched larger service ventures. One group of budding entrepreneurs took advantage of railway bottlenecks, buying used trucks or buses from China to offer inter-city freight or bus services. Some automobile owners even began to offer an Uber-like service.
Today, images of relatively stylish shoppers and piles of merchandise in marketplaces might suggest that commercial and service enterprises are capable of pulling North Korea’s economy onto the path of self-sustaining growth. In reality, they have only limited power to drive sustained growth in the North Korean context. Manufacturing cannot stimulate production with facilities that are largely decayed, and services can expand expenditures and GDP only insofar as there are customers who can afford them. In fact, most of the goods being sold in North Korean marketplaces are either luxury items smuggled in, or electronics, cosmetics, and other imported merchandise popular with the country’s small number of rich or middle-class consumers. The dominant product in markets is rice.
Accordingly, private commerce and service enterprises in North Korea are unlikely to be an engine of significant economic growth. To be sure, capitalism has boosted domestic production in the last 20 years. The total increase is roughly equal to the current yearly sum of profits, bribes, stall rents, and other operating expenses. Capitalism has managed to survive repeated crackdowns by hardliners, and eventually helped inspire the bureaucrats and Kim Jong-un to transplant some of its traits to agriculture and industry. That transplant has produced only modest success given ideological hurdles and poor understanding of capitalism’s other traits.
In the face of the limited locomotive power of private enterprise in the North, what would bring significant GDP growth would be factories established by the traders and service entrepreneurs who have accumulated capital (donju, a recent Korean word meaning “money owner”). Manufacturing has a multiplier effect on domestic output as workers are hired and suppliers emerge. Having money owners launch industrial plants would be the consummate capitalism play, one that would disprove the central argument of this article, if they could remain free and pay bribes merely comparable to ordinary corporate taxes (in a country that is proudly free of taxes as such). Of course, entrepreneurs would run into the same infrastructure deficiencies; the money owners’ own lack of knowledge about overseas markets and technology; and the compelling need for property rights. Has Kim Jong-un done anything to address these obstacles to North Korean industry?
Kim presents his basic policy as promoting both the military and the economy in tandem. This in effect means that the military will continue to get the lion’s share of capital budgets, ensuring that the same lack of capital that explains North Korea’s infrastructural deficiencies will continue. Regarding the pervasive problem of power shortages in particular, the construction of a coal-fired power plant to supplement an old station near Pyongyang has been announced. This decision came despite the obvious shortage of coal. Also announced has been an early 2013 launch of multi-tier hydro-electric plants on the Chongchon River. The latter decision came even as the newest plants, the Huichon Hydro-Electric Stations No. 1 and No. 2, were completed in early 2012, some 35 years after construction began, albeit generating far less power than their joint capacity of 300,000 kilowatts due to shallow river flows above the dams. Hence, even if the two projects are completed without undue delays, they will be of little significance. The only sign of a determined action to break the grip of power shortages would be to build oil-based power stations, and there has been no such move.
These issues go back to the day’s of Kim’s grandfather, Kim Il-sung, who faced power shortages in 1974 when advance planning for the Second Seven-Year Plan was underway. Coal for power generation was in short supply because it was also used as industrial raw material via gasification. As to the hydroelectric alternative, the costs and time involved in building new dams at those sites still available were prohibitive, as all the most obvious locations had been built on beginning from the Japanese colonial era. The solution to this dilemma would have been to invest in oil-fired power plants able to run independently. But the older Kim ordered the construction of more hydroelectric stations anyway, stating: “Certain scientists recommended building oil-burning stations because they can be completed in less time than hydroelectric plants. That is true. But it will require importing oil not available in our country.” Building sensible power plants called for abandoning a commitment to autarky and earning export dollars to import oil. Kim refused to compromise his own ideology and left the power-shortage predicament unresolved, as it remains today. Not surprisingly, Kim Jong-un’s New-Year address in 2014 called for generating more electricity with priority given to hydroelectric resources.
Now, even if the problem with power and other infrastructure is solved, North Korea’s capitalist play would still be hard pressed to turn commercial and service money-owners into industrial capitalists, in part because the seclusion and autarky creeds keep them from making trips abroad that might help them to learn about overseas markets and technologies. As a consequence, they are bound to miss opportunities to set up simple manufacturing operations that could pluck the low-hanging fruit that typically prevails in foreign consumer markets. That low-hanging fruit has nourished countless upstart factories in poor countries since the 1950s, including South Korean firms exporting wigs made of the hair of rural girls. Early factories can grow for a while using cheap labor and fabricating import replacements. In his New Year Address 2015, Kim demanded that North Korea get “rid of the disease of importing.” However, import substitution cannot prosper for long because domestic markets for most replaced goods are small in poor countries. Finally, prospective industrial capitalists want secure property rights before they sink their money into plant and equipment. Here again, the flirtation with capitalism has been ineffectual, owing to a Juche-communism hurdle: All land in North Korea is owned by the state or collectives. So it is in China, but in that country’s flexible interpretation of communism, industrial land is leased to investors for up to 70 years. Pyongyang could likewise provide a degree of investor security on similar terms. However, nothing like it has been broached. Hence a meaningful migration of commercial and service capital to the industrial sector necessary for a self-reinforcing growth has not occurred, and nor is it likely to do so in the future given the rigidity of Juche communism.
Property rights likewise are important for raising efficiency in food production, which in turn feeds urban workers and releases labor for industrial growth. China boosted farm productivity beginning with its proclamation of the Reform and Opening Up policy at a central committee meeting in December 1978. This led to the “family responsibility system” in farming, breaking up the communal farms and granting land-use rights to individual farm families. The land-use contracts began with a three-year term in 1979, but gradually increased to 45 years. Of equal moment, the 1978 declaration stimulated manufacturing and other sectors by permitting private enterprise and opening China to the world. The ensuing capital and technology inflows and widespread advances in industry reduced the prices of farm equipment, fertilizers, and other supplies needed for farm productivity, which could then rise in step with increased farmer incentives.
Kim Jong-un has learned from China, and modified the Juche system to bolster farm productivity through enhanced farmer incentives. Juche farming imposes two debilitating features, one of which is self-sufficiency in grain. The other is the basic work-unit on the farm called the sub-team, which had remained essentially the same since its 1965 formation by Kim Il Sung. The sub-team traditionally comprised several families of about 20 members, who were assigned a designated plot and a production quota. Kim Jong-un has stuck to the grain dictate, but has issued instructions to downsize the sub-team to the family scale. Reform details were not publicized officially lest heralded changes hurt Juche’s “eternal” authority, but in the summer of 2012, local farm authorities were reportedly notified of a June 28 reform reducing the sub-team size to 2-6 members, along with correspondingly smaller farmland allocations.
This downsizing enabled most farm households to be officially dubbed sub-teams – honoring Juche. The ruling-party mouthpiece Rodong Sinmun has used this term, and has speculated that the uneven capabilities of sub-team leaders caused the poor harvest in 2014. The reform also reportedly sets the family’s share of the harvest at 30 percent of its production quota plus any output above the quota, leaving 70 percent of the quota for state procurement. Since under the previous policy, the state set a high share that was unrelated to the harvest, the June 28 measures offer significant production incentives. While these reform-related numbers are not verified, the thrust of Kim’s efforts has been to bolster production incentives, by means of granting property rights of sorts: Land allocations of undefined timeframes coupled with a more favorable formula for crop sharing amount to the conferring of property rights – even if primitive – on farmers. If these incentives are sustained through adherence to the land allocation and the sharing formula in the next few years, tracking the vagaries of weather and supply, farm production will rise.
That said, the boost in the harvest will be modest, because in contrast to China’s reform of 1978 the North’s economy remains closed, which means that manufacturing will not develop the efficiencies needed to produce cheaper supplies for farmers. North Korea’s agriculture desperately needs fertilizer and herbicides, diesel fuel for tractors, and plastic sheets for covering rice and corn seedlings in early spring. Most farm tractors are maintained by cannibalizing parts, the newest of them manufactured in the mid-1980s. Pyongyang needs to replace much of its tractor stock. All of these needs require robust manufacturing, electric power, and industrial raw materials, none of which will be readily available unless North Korea opens its economy. Until that happens, the benefits for agriculture will be minimal.
Along with the farm decision-making at the family level, the June 28 reform did give state enterprises a degree of autonomy, including decisions on product prices and wages. These changes generated some spectacular stories, such as certain workers seeing their wages rise a hundredfold in the first year. This was a natural outcome of allowing some enterprises producing essentials such as fertilizer, soy source or cooking oil charge market prices. Affluent buyers offered high prices and got all they wanted. Meanwhile, these lucky manufacturers continued to source their raw materials at below-market prices, allowing them windfall profits and the scope to offer huge wage hikes.
After the early publicity and enthusiasm, the manufacturing component of the June 28 measures has been staggering under the weight of its faulty design. Repeated reports have emerged of factories making mundane products such as shoes struggling to find raw materials. Raw materials have always been in short supply for consumer-goods producers, but now they are simply unavailable for some companies producing non-essential products. This development underscores the problem of attempting to introduce capitalism principles to some sectors and not others.
Meanwhile, Kim Jong-un is doing his best to keep his country closed. In fact, Kim is actually tightening control over the border with China, compared with his father’s era. This is partly to prevent defections and partly to fight the rise in smuggling, but it is also a response to the growing realization among North Koreans that their Southern neighbors are rich. This realization has been helped by propaganda being sent by South Korean activists via balloons over the North-South military line. Kim has angrily pushed Seoul to block the leaflets, free speech or not. He is enforcing national isolation not merely in deference to Juche, but also to ensure his personal survival by keeping his people uninformed. That leaves little scope for capitalism.
While keeping the country closed, Pyongyang has attempted to access foreign capital and technology through the back door method of promoting free enterprise in restricted territories. The first special territory, announced as early as 1991, was the Rason Zone. Then came the Kaesong Industrial Complex established jointly with South Korea in 2004. The latter prospered because Seoul promoted it. But Rason attracted little capital other than some money from Hong Kong targeting the hotel and gambling business for Chinese patrons.
Pyongyang doubled down for Rason in 2010, granting special concessions to Chinese interests through an agreement with Beijing to jointly administer and develop the zone. Then there was the dramatic 2013 announcement of an avalanche of 14 new special zones, made at an international conference in Pyongyang on special economic zones organized by the University of British Columbia. All of this special-zone activism of recent years came under the personal direction of Jang Song-thaek, Kim’s uncle, who was notoriously executed on December 12, 2013. Part of Jang’s alleged crime was granting excessive concessions. But he had no choice if he was to make headway, because the capitalist instinct that Pyongyang overlooked is to avoid investing in an untrustworthy territory where assets can get trapped and profits are difficult to repatriate.
Seoul had to shut down the Kaesong Complex in 2013 after Pyongyang blocked workers from coming to the site as part of its escalation of politico-military tensions. Although the complex was eventually reopened, Pyongyang acted up again in 2014 by suddenly declaring it had unilateral say over wage decisions, a move that has led to rising inter-Korea tensions. Despite these frustrations, Seoul persuaded the North to invite foreign companies to the site, presumably to make Pyongyang think twice before causing trouble for the complex again. To date, though, the only foreign manufacturer to have expressed interest is a German producer of sewing machines that is setting up a sales shop in the complex.
Kim Jong-un appears to be committed to the Juche regime of self-sufficiency and political seclusion. Combined with communism, these are heavy chains. Bound by them, North Korea’s flirtations with capitalism will deliver little for the economy.
Hy-sang Lee is a retired professor of economics, University of Wisconsin-Oshkosh, and author of North Korea: A Strange Socialist Fortress, 2001.