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North Korea: Witness to Transformation

Hewers of wood and drawers of water

by | April 30th, 2012 | 06:01 am

The current issue of Good Friends North Korea Today contains a brief article titled “Replace imported goods with domestic products.” It is reproduced in full below:

“The Central Party issued an order to “replace imported goods with domestic products. An official of the Central Party noted that, “since bringing stability to people’s lives is the national priority, we’ve ordered the normalization of the operation of light industry factories to focus on producing people’s consumer goods.” On January 5th, there was an initiative to improve the ratio of domestic to imported products, in Pyongyang’s Gwangbok Department Store, to 40 to 60 by selling the domestic products below market price although the prices may be slightly higher than in state-run stores. Because the department store opened recently, most products are imported from China and so the prices tend to reflect those of Chinese local prices. This modern department store has attracted quite a bit of enthusiasm from Pyongyang residents but, because the prices are too high, the customers are limited to government officials and wealthy people. One member of the Central Party said that, because China’s share of investment amounts to 65%, the majority of goods in the store may continue to be Chinese goods. However, the Party insists that, by normalizing the operation of light industry factories, it plans to concentrate domestic products in state-run stores. The Party claims that if cheap domestic products are supplied on a mass scale, the market for imported goods will gradually decline. While it would be difficult for the time being, due to the limited production of domestic goods, it is expected that the number of imported items that could be traded in domestic markets will be dramatically reduced within two to three years. The leadership calculates that, when the national supply system is completed, the market for imported goods eventually can be shutdown.”

Where to start? In development economics there is a long history of so-called “import substituting industrialization” (ISI). The state typically intervenes to promote local industry (sometimes on a truly fantastic scale) by restricting imports and using various policies, most notably capital channeling or subsidies for preferred activities. Protected from competition, these preferred projects are normally inefficient (again, sometimes fantastically so) and drain resources from more efficient, though less politically favored sectors. The state’s provision of favors gives rise to rent-seeking and outright corruption as producers compete for access to subsidized loans, for example. The distortions normally contribute to an overvaluation of the exchange rate and recurrent balance of payments crises. Forays into ISI normally end in tears (cf. Pakistan, Ghana, the Philippines, and countless others too numerous to list). This history is well-known, though perhaps not to policy makers in Pyongyang.

North Korea’s classic centrally planned economy could be interpreted as ISI in the extreme: market signals were thoroughly suppressed and comparative advantage ignored as the state promoted development of the commanding heights. From a starting point that actually advantaged North Korea relative to the South, the CPE/ISI regime has yielded history’s first peacetime famine in a semi-industrialized economy and a level of per capita income today perhaps 15 times lower than that in the South.

The marketization of the North Korean economy over the past two decades amounted to an unplanned, bottom-up, partial escape under duress from this policy regime. The upshot, however, is that with the development of more advanced forms of production undermined by institutional weakness, what has emerged and proved sustainable in this environment are simpler forms of production and exchange based on extraction and trade. North Korea has regressed to a status of China’s hewers of wood and drawers of water, supplying natural resources in exchange for Chinese consumer goods. A Northeast Asian Indian reservation. A modern day hunter-gatherer economy.

Now the state is reportedly striking back, restricting importation of Chinese consumer goods, and subsidizing the consumption of locally made products, apparently with the eventual goal of reducing international trade and moving back toward autarky. But even setting aside that ultimate aim, as long as the state remains fundamentally conflicted about the market and unwilling to embrace the institutional reforms necessary to support a modern economy, the likelihood that it will successfully complete the first step—to oversee “the normalization of the operation of light industry factories”—is remote.

There is something profoundly otherworldly about economic policy making in North Korea. The leadership does not seem to grasp that there is a relationship between foreign policy provocations and the ability to attract the foreign investment it claims to desire. Now it is reported that it wants to eventually “shutdown” the market for imported consumer goods. Sad to say, it is the North Korean people who pay the price for such illusions.