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North Korea: Witness to Transformation

Is North Korea About to Go Capitalist?

by | October 10th, 2013 | 06:34 am
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Everywhere I went in Tokyo last week, Japanese officials asked me about a story that appeared in Dong-A Ilbo titled “N. Korea`s new economic system could reduce state control.” The article claims that planned reforms will turn the country off the socialist path and “bring a huge change in North Korean society.” My Japanese interlocutors believed that the new system would go into effect on 1 January 2014 and that Jang Song-taek was at the center of all this. Dong-A Ilbo then followed up with an article the following day, “Gov’t confirms N. Korea seeks economic independence” basically claiming that the South Korean government endorsed the analysis of the first article. Whew. How do you say “chutzpah” in Korean?

Is North Korea about to go capitalist? The article does not cite any documentary evidence for its claims (nor does it cite any named sources in the subsequent “endorsement” article.) It argues, correctly in my view, that many SOEs operate as private firms, or perhaps more accurately, have private firms embedded or affiliated with them. The article then asserts that the legal establishment of private firms is inevitable. It further argues that the existing procedures for selecting SOE managers will be overturned (with workers given a greater voice, apparently like the worker-managed enterprises in the old Yugoslavia) and the Party’s role greatly circumscribed. An unnamed source claims that these developments are regarded favorably by the workers. Honestly, it is a little hard to square these claims with recent reports summarized yesterday by Steph Haggard of intensified state control measures, including blacklisting and downgrading of songbun, associated with relatively minor infractions at the KIC.

The paper then makes some claims that are a little easier to swallow. It says that, since the announcement of the “June 28” measures, the North has permitted on a pilot basis relaxed rules of foreign engagement involving 300 companies in areas of putative comparative advantage including apparel and mining. Dong-A Ilbo then asserts that “the acceleration of this trend can lead to [an] increase of companies partnering with foreign companies, which will inevitably lower the barriers of the closed regime that has maintained North Korean society.”

The following day, the paper ran an article with the lede “The government said that the Dong-A Ilbo’s report on North Korea’s introduction of a market economy in factories and businesses is right…” (Man, it must be fun being a newspaper publisher in South Korea.) But the article then went on to strike a more cautious tone, quoting an unnamed South Korean Unification ministry source as saying “If North Korea tries to start opening in earnest in January next year, it must have started policy adjustment with its internal system. But we haven’t found any sign yet.” (So maybe capitalism isn’t breaking out quite yet.)

The piece ends with a quite plausible observation by Yang Moon-soo, a professor of the University of North Korean Studies, “The prospects for a big bumper year in North Korea can be interpreted as the result of last year’s June 28 measures, which is notable.” Indeed, there have been a series of recent press reports that indicate that the food situation in North Korea has improved due to a better than expected harvest and somewhat higher than normal imports from China. Some of the improvement in the harvest could be due to better than expected weather conditions (despite seasonal flooding earlier this year) and buoyant minerals prices may be financing the grain imports. But nothing succeeds like success, and it is quite possible that some in North Korea are attributing these developments to favorable effects of the reforms rumored last year.

So what do we know?  We have assertions that changes continue in North Korea, but no smoking gun that would point to the introduction of capitalism or even market socialism. The notions that North Korea continues to evolve, including with respect to acceptable forms of exchange and property rights, and that the government is becoming more relaxed about controlled opening, do not strike me as implausible.

But control remains the operative modifier. Last year, for example, when analysts tried to understand the June 28 changes in agriculture, the consensus was that while they did embody advisable improvements in incentives to farmers, ultimately the state retained control over both grain prices and input prices, and as such the measures amounted to an attempt to improve the workings of the existing socialist regime, not a move toward market economy. Likewise, Haggard’s post yesterday outlines the attempts to both improve incentives in the foreign investment sphere, while at the same time maintaining political control, in possibly stark ways.  In short, as I told my Japanese counterparts, my guess is that these recent stories more likely represent continuing tentative moves toward improving the existing system rather than any wholesale reform. But I would be happy to be proven wrong.