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2009/09/17 11:14 KST
NORTH KOREA NEWSLETTER NO. 72 (September 17, 2009)


The Marketization of North Korea and What It Means

By Andrei Lankov (Associate Professor, Kookmin University, Seoul, Korea)

North Korea is frequently described as a "Stalinist country." This definition is not completely unfounded, but it is becoming increasingly obsolete. Important, albeit not highly visible, changes have taken place inside North Korea. While North Korean politics still retain some Stalinist features, its economy can hardly be described as a "Stalinist, centrally planned economy" any more.

   In North Korea, the collapse of the old Soviet-style economic structure began in the early 1990s, even though its gradual decline was noticeable from the 1970s, if not earlier. Even in the best of times, North Korean economy was not a paragon of efficiency. Its structure was once designed in strict accordance with the traditions of Stalin's Russia. The central control over production was total. Since the late 1960s trade almost disappeared, since virtually all food and many consumption goods were rationed. Unlike Stalin's Soviet Union, the farmers were not allowed to cultivate even small plots of their own. The black market existed, but government was successful at keeping it in bay. An exceptionally high level of military spending aggravated economic situation further.

   This hyper-Stalinist economy continued to function only because other Communist countries (above all, the Soviet Union) were willing to provide direct and indirect subsidies. The collapse of the Soviet Union meant that aid was suddenly discontinued. Chinese aid also decreased dramatically when in 1992 China established diplomatic relations with Seoul. Deprived of this foreign aid, the North Korean economy began to fall apart. North Korea has not published statistical data since the early 1960s, but it is estimated that by 1999 the country's industrial output was some 50% of the 1989 level (and 1989 level was also very low one). The Soviet-style economy of steel mills and coal mines came to a standstill.

   Soon afterwards, the North's state-managed agriculture collapsed as well. The state is a bad farmer, as most communist countries learned from their own sad experiences, but in North Korea this ingrained inefficiency of the state-run agriculture was made worse by heavy dependence on fertilizer as well as by predominance of irrigation systems which relied on electricity-driven pumps. Without heavily subsidized Soviet oil, both fertilizer production and electricity generation suffered a heavy blow. Even in the 1980s the average harvest barely sufficed to keep people fed.

   In order to deliver rations to the entire population, North Korea needs to have 5.2 million ton of grain. By the mid-1990s, it was harvesting less than 4 million tons and in 1996 the harvest probably was below the 3 million ton mark.

   For decades, since 1957, the North Koreans obtained their grain rations (their major source of calories) via the Public Distribution System (PDS). Under stress, in 1994 the PDS ceased to function in the countryside, and by 1996 the rations were not delivered even in the major cities. A famine followed, to continue until 1999-2000, leading to the deaths of an estimated 600,000-900,000 people.

   The common North Koreans, who for decades had to rely on the state for all their basic needs, discovered that in the new situation they had to survive alone. The reaction of society was predictable: the desperate and starving North Koreans re-discovered capitalism. From 1994-1995 huge markets began to grow in North Korean cities. Markets were never completely banned in North Korea, but until the Great Famine of 1996-99 they remained small and marginal. Since the mid-1990s, however, markets have come to play decisive role in North Korean economy. As North Korean joke goes, "there are only two kinds of people in North Korea nowadays: those who trade and those who are dead."

   Markets began as place to exchange goods. Nonetheless, soon some entrepreneurial North Koreans switched to services and manufacture. By 1997 all state-owned canteens ceased to function, but by 1999 a number of private eateries appeared across the country - from cheap food stalls to rather sophisticated and expensive sashimi restaurants. People began to make garments and footwear, usually imitating Chinese items. Private inns mushroomed as well, and money lenders appeared too. The entertainment industry followed, with karaoke rooms being popular for a while.

   The farmers are still usually prohibited to till land privately -- though some exceptions are sometimes made (like permission to cultivate fields on steep mountain slopes). Nonetheless, farmers wisely ignore this ban and do some private cultivation, producing vegetables for sale.

   China looms large in North Korea's spontaneous marketization. Nearly all consumption goods which are sold at the markets are of Chinese origin. The vendors and wholesalers are eager to buy items which could be smuggled to China: from dried squids to gold dust to Koguryo-era antiques. Some of these exchanges with China are quite official, but in most cases smuggling is a preferred way of making business. The border with China is lengthy and badly protected, and poorly paid North Korean border guards are willing to look other way if the reward is sufficiently high (smugglers say that for $300 you can move across the border a boatload of unchecked merchandise).

   Many North Koreans found a refuge in China, illegally residing in the borderland areas. At first, in the late 1990s people fled starvation and possible death, but since around 2000 illegal labor migration became quite common. North Korean refugees take jobs which are seen as difficult or dangerous by the Chinese, and they are willing to work for a salary which is meager even by Chinese standards. In China, a North Korean worker is usually paid between $30 and $50 a month, plus accommodation and basic food. In North Korea, the average salary is less than $2 a month, so unskilled work in China looks like an attractive option. Most of these migrant workers stay in touch with their families, sending money to North Korea.

   Unlike China, where the Communist party embraced the market, North Korean leaders feel very insecure about this spontaneous growth of grassroots capitalism. They are afraid that marketization of the economy will undermine their control over society. So most of the private economic activities remain technically illegal. From time to time, authorities stage crackdowns, while government propagandists keep reminding that the lofty principles of socialism should be upheld no matter the cost. For a while, the government seemed to be more ready to accept some changes (this relative relaxation reached its climax in 2002), but since 2004 the crackdowns have intensified.

   In 2005 the authorities re-introduced the PDS and tried (unsuccessfully) to ban the private sale of grain. In 2006 they banned males from the markets. The assumption is that males should go where they belong, to the state-run factories (now these factories are normally idle, so workers spend their days attending indoctrinations sessions). There were attempts to introduce maximum prices for some goods, and in 2009 the government even attempted a nearly complete closure of markets (to no avail). Some of these measures can be described as partially successful, since the scale of market activities seeming diminish somewhat in last few years. Nonetheless, the profound social changes seem to be irrevocable: no revival of Stalinist economy is possible.

   Nonetheless, the North Korean grassroots capitalism remains technically illegal, so traders and entrepreneurs have to find some ways to operate without attracting too much attention. Usually they do it by bribing officials, and also by registering their companies with some government agencies. Nowadays, for example, one hardly can find a single state-owned eatery outside Pyongyang. However, all private restaurants are registered as if they belong to the state. The owners pay some money to the local administration, and continue their business. The private bus or truck companies use the same approach. Investors buy used vehicles in China and register the vehicles with some government agency as if the trucks or buses are state property managed by these agencies. The executive officers of the agency get regular payments from their owners, who otherwise run their vehicles as they consider necessary.

   The changes had a remarkable social effect: for the first time in 50 years, a considerable number of the North Koreans have become economically independent of the state. The North Korean entrepreneurs (and their employees who constitute another fast growing social group) have a new mindset; they live in the milieu where the state is not a force which provides for all basic needs, but rather a annoyance to be avoided whenever possible. They are also exposed to much new information, so they know that North Korea is not an embodiment of prosperity and economic success, but a poor country, lagging well behind its neighbors. Finally, these people have formed networks which allow them to organize. The market riots which became frequent occurrences after 2004 are a testimony to their potential for collective action. The growth of market changed North Korean economy. Sooner or later it will have social consequences, too.