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North Korea: Witness to Transformation

The “June 28 Directive” and July 26 “Let us Effect Kim Jong Il’s Patriotism…”: Not Yet Time to Break out the Soju

by , , Marcus Noland and Jaesung Ryu | August 6th, 2012 | 07:00 am

Change is clearly underway in North Korea from the sacking of KPA general staff chief Ri Yong Ho to Kim Jong Un’s “secret wedding” and his much more public persona. To these changes we might be able to add some modest economic policy experiments. Is reform afoot?

Let’s calibrate expectations. First, to our knowledge there is no document that actually spells out—in print—the reform measures that are getting so much Western attention. Everything we are speculating about is based on reporting from a small handful of second-hand Korean sources. This is significant not only because the reform rumors may simply be false, but because the leadership has not committed publicly to the measures that are getting so much attention.

Second, however, this is understandable because no leader of North Korea is going to stand up and embrace market-oriented polices and protection of private property rights per se. Any reform (or “improvements” [개선]) must be embedded in an ideological justification that ties it to the existing regime and its historical antecedents in the Great and Dear Leaders. The document “Let Us Effect Kim Jong Il’s Patriotism and Step Up the Building of a Prosperous Country”—released to the public on July 26—is not available in English yet, although the KCNA devoted no fewer than four separate stories to it on August 3. But it is laden with efforts to tie vaguely-worded economic objectives to patriotism and Kim Jong Un’s family lineage; this is the sort of ideological engineering we would expect.

Third, it is also important to recognize that no reform in such a system is going to overthrow the state-socialist system or be big-bang in form. Given the nervousness and ambivalence of the leadership toward the market—some of it well-founded–policy changes are going to be piecemeal, experimental and modest. Moreover, their objective is going to be strengthen—not weaken—the state socialist system. “Reform” could even make things worse; think the 2009 currency conversion.

Finally, there has been a lot of loose talk suggesting that “reform” implies some sort of political change. To the contrary, economic reforms or improvements are designed to consolidate power and forestall political change, not lead it. One need look no farther than the DPRK’s northern neighbor to understand that dynamic.

The real questions are therefore somewhat different. First, can we see evidence of a political formula that would permit marginal adjustments in ideological appeal, the allocation of resources and the introduction of incentives to managers and cultivators? Can Kim Jong Un pull this off, and if so, how exactly?

And more importantly, do we see evidence that reforms build on one another? Are they vulnerable to stall and reversal? This last question is ultimately the most important, and the regime’s record on it is clearly not good. The modest reform efforts that have been tried in the past have almost all been reversed outright or picked apart in implementation. But it is also too soon to tell and it would be wrong to reach a judgment prematurely.

So what’s supposedly going on? According to a recent commentary by KINU, as well as coverage by the Chosun Ilbo and the Daily NK, the regime seems to be prepared to decrease the size of cooperative farm work units (분조) from 10-25 to 4-6 people. This policy change would potentially make them into family-based production units with the high-powered incentives for investment and work effort that follow; students of the Chinese reforms will recognize the similarity to the early rural reforms there.  These measures have reportedly been introduced on an experimental basis in three counties in Ryanggang (Yangkang) province; interestingly, as with the special economic zones, this experiment is far from the center or from the main rice growing areas.

The state is reputedly also altering the formula for the disposition of output in these experimental regions, splitting target output into shares of 70 percent for the state and 30 for the work team or the cooperative farm—information is not precisely clear on this point–and allowing the cultivators, again either the work team or the coop, to keep any production exceeding the target.

One of the most intriguing aspects of these changes are reports that the purchase of grain will take place at market prices. This has been attempted before, but the government subsequently did not raise prices adequately to keep pace with the inflation unleashed by the 2002 reforms; as a result, the key incentive contained in the reform dissipated.

So far, so good.  The problem is that we—and more importantly North Korean farmers—have seen this movie before (if it is even being played).  Similar experimental reforms involving alterations in work unit size, formulas for setting targets for and the disposition of output, increases in sanctioned private garden plots, greater autonomy in planting decisions, and more play for farmers markets have been tried before—and rescinded—going back at least to the late 1990s. Such reforms hinge entirely on the credibility of the government. Do they really mean it this time? If farmers don’t believe the reforms will stick, there is no incentive to play along.  In this regard, the fact that a new leadership is in place can constitute a plus. But only if Kim Jong Un can convince farmers that he is not going to follow in the footsteps of his father; you can see the ideological conundrum.

Moreover, it is important to underline that the problems in North Korean agriculture are by no means limited to the perverse production and price incentives facing farmers. The rural sector is also bedeviled by shortages of inputs, particularly fertilizer, which would have to rise as a priority in government spending against competing claims. Post-harvest losses are huge. The cooperatives are also riven by corruption. Testimonies from refugees (both cultivators and coop office workers) as well as an NGO representative who spent an extended period on a cooperative farm, paint a picture of a highly corrupt environment marked by extraordinary tension between managers and cultivators.  The NGO rep said that the managers knew that they “would get their throats slit when it went off.” Ironically, the proposed reduction in work team size could actually make some problems worse. It may be easier to figure out how to use a tractor that is being shared by 25 workers in a single work unit than to split its usage across 5 competing work units of 5 workers each.  Such decisions create yet another opportunity for rent-extraction by coop managers.

The supposed policy changes are not limited to agriculture, but plans for the state-owned enterprise sector are even more vague. Much excitement was generated by reports that the June 28 directive (“On the Establishment of a New Economic Management System in our Own Way” [우리식의 새로운 경제관리체계를 확립할 데 대하여], hence “the June 28 Directive”) would legalize private investments through state-owned organizations (국가기관) and other cooperatives (편의협동기관) in the service and trade sectors, even though the directive itself does not actually descend to such detail.

According to reporting by the DailyNK, these investments would grow out of a wider managerial reform that parallels that in agriculture. To cite the piece by Kim Kwang Jin, the reform would have “the state making initial investments in industrial and agricultural facilities and inputs, then procuring production at market prices according to pre-set targets while allowing a percentage of target production plus any over-fulfillment to remain with the production unit for distribution and/or sale.” Presumably out of the retained earnings—effectively profits—of the enterprise, new investments could be forthcoming.

Not to throw too much cold water, but supposed SOE reforms face similar problems as those in agriculture. The SOE reforms have not been done yet, nor to our knowledge even tried on an experimental basis. The DailyNK reports only that inspection teams are doing an assessment of all production facilities to gauge their condition. The government would still make decisions about the allocation of resources in the planned sector, which may or may not be more efficient than in the past.As Dan Pinkston of the International Crisis Group pointed out to us, this measure could even be an anti-reform one if existing private investments  are reeled back into the state sector.

And if there are problems with inputs in the agricultural sector, the ongoing shortages of power, capital equipment and intermediate inputs in manufacturing are equally daunting. These problems are not likely to be solved without a serious opening to foreign direct investment; the story on that front is a litany of trouble, as we have argued repeatedly.

To return to our core questions, what is the political dynamic at work here? In an earlier post, we reported speculation that the ouster of Ri Yong Ho might have had policy roots. If so, it would only seem plausible to us if there were conflicts over the economic prerogatives and obligations of the military. These include control over the rents generated by military companies or demands that the military pull more of its weight economically, including through participation in reconstruction projects.

Behind these skirmishes, however, is a much larger and more consequential issue. How are resources going to be allocated between military and civilian purposes and among competing civilian purposes (think juche steel vs. consumer goods). And even more importantly, how will the decisions on resource allocation be made? Back in April, we commented on a statement by Kim Jong Un to the Party Central Committee, subsequently published in the state media, in which he declared that “all problems arising from economic issues are to be focused on the Cabinet, and the Cabinet will put regulations and orders in place to resolve them.”

Within the party and government, attention focused on the return of two individuals who played a role in the 2002 reforms: Vice-Prime Minister Roh Du Cheol and Pak Pong Ju, the head of the KWP’s Light Industry Department (which was previously run by none other than Kim Kyong Hui; again, see DailyNK coverage). But a careful scan by our colleague Luke Herman does not suggest that these two are political heavyweights, at least by the few measures we have at our disposal. Near the end of KJI’s rule, Pak was making quite a few appearances with Dear Leader: 46 from 07/11 – 12/11 to be exact. However, he’s only shown up a handful of times with KJU and was way down the formal rankings (135 on the Jo Myong Rok funeral ranking and 124 on the Kim Jong Il funeral ranking). Ro has showed up with Kim Jong Un on a few more occasions and following his promotion to alternate member of the Politburo, he is ranked 28th or 29th, actually not bad for an economic official. But we don’t yet see a strong embrace of technocrats.

Then there is the question of whether the 2002 reforms should be taken as a benchmark. The 2002 reforms basically failed.  They were poorly designed and badly implemented.  So unless something in the basic political economy or policy process has changed, it is not clear why bringing back these guys should necessarily generate a more positive outcome.

In sum, we do not even have any documentary evidence that reforms have been launched. If they have, however, they should be salutary. Given how inefficient North Korean agriculture and industry are, even relatively simple incentive reforms could elicit a noticeable supply response. The similarity to Chinese reforms introduced in the late 1970s goes without saying and any move along that policy frontier is a plus. The fact that they are modest and incremental in design should not be read as a negative; it is what we would expect.

But the critical factor that existed in the Chinese case, and has yet to be observed in North Korea, is a clear, unambiguous signal from the top that the reforms are here to stay, and those who grasp their possibilities will not be punished.  The documents which are actually on offer are a pastiche hinting that more attention should be given to economic objectives, but in the context of songun, patriotism, “socialism in our own way” and above all the preservation of the existing system. Given the reluctance of the regime to even use words such as “reform” and the history of regime bigwigs like Kim Kyung Hui trashing even marginal policy adjustments,  it will probably take more than an on-the-spot guidance tour to a cattle ranch to signal commitment. Kim Jong-un himself will have to be more direct if he is going to convince both officials within the regime as well as managers and producers. Even if any reform process will have temporary setbacks, there has to be ample time for the reforms to generate some winners; in the absence of a coalition of support, the naysayers—and we suspect there are plenty—will pick them apart.

Again, if they exist.

Here is a quick roundup of some of the more thoughtful commentary: