North Korean Economy Watch

Pictured above (Google Earth): The DPRK’s State Planning Commission (국가계획위원회) in Pyongyang

UPDATE 21 (2012-11-15):  Writing in 38 North, Randall Ireson offers a succinct, comprehensive assessment of the DPRK agriculture system and offers policy advice moving forward. See the full article here.

UPDATE 20 (2012-11-12): Chris Green at the Daily NK points out anecdotal evidence that economic policy changes are still underway in the DPRK:

As noted by Yonhap in an article yesterday, recent days have seen multiple uses of phrases including “new management method” in the North Korean media, lending weight to the suggestion that a number of new economic measures have already been put into practice.

For example, last week on the 7th, state domestic and international radio broadcaster Chosun Central Broadcast ran a recording of a meeting of forestry workers at the People’s Palace of Culture in Pyongyang.

During the event, which was attended by high regime officials including Cabinet Prime Minister Choi Young Rim, the manager of a wooden goods manufacturer in Hamheung declared, “I will keep updating our industrial strategy and tactics in accordance with the demands of the new economic management method and give our management substance in order that we may secure the greatest possible profit and raise the productivity of investment.”

The words raise the question of whether factories such as that of the manager in question are actually acting autonomously in terms of management decisions, rather than simply taking orders from agencies higher up the food chain. If so, it would imply the implementation of new economic rules.

On a similar note, a November 9th article carried as part of a series by the Chongryon publication Choson Shinbo under the title ‘The Road to Our-style Economic Revival’ noted the introduction of a “new management method” in a piece on how Pyongyang’s No.1 Department Store has been changing in order to improve customer service.

Choson Shinbo has a history of reporting North Korean economic changes first, including the July 1st Economic Management Improvement Measures of 2001, making it one outlet for North Korea news worth keeping an eye on.

Reviewing the anecdotal evidence for the introduction of new measures, Cho Bong Hyun of Industrial Bank of Korea’s research arm told Yonhap, “The phrase ‘new economic management method’ shows that the new economic management measures that they never officially revealed have already been implemented. If their confidence in the new economic system grows, they will doubtless begin to present them as the achievements of Kim Jong Eun.”

UPDATE 19 (2012-10-19): Contrary to other claims (below), CCTV (China) reports that the agriculture policy changes have been implemented:

UPDATE 18 (2012-10-18): The Institute for Far Eastern Studies (IFES) reports that the DPRK’s new economic management measures are stalled:

North Korea’s new economic policy, otherwise known as the ‘June 28 Measure,’ was to go into effect from October 1, 2012 but it is reported that enforcement of various educational and action plans related to the new economic management measure was halted.

According to the Internet news agency, Daily NK, its sources inside North Korea informed that, “From this month, the authorities in charge of implementing various plans preparing for the new economic measures, suddenly stopped educational and other related programs without any notice.”

Starting this July, North Korea began to make announcement through the Third Broadcast, to educate and inform specific plans related to the new economic measure to the North Korean residents. The Third Broadcast is an internal cable broadcasting system usually used to deliver important message to its residents.

The main objectives for the new economic management improvement measures are to improve autonomy in the factories and cooperative farms and the food distribution system. However, speculations began to surface that the new economic policy will be postponed after the Supreme People’s Assembly was convened on September 25, with no mentioning of economic measures or laws, contrary to expectations.

Since the plans for the new economic policy was announced to the public, exchange rates and market prices began to soar, creating hyperinflation phenomenon.

If North Korea continues to postpone the economic improvement plan, is likely to lead to adverse consequences as it can amplify the anxiety amongst the residents and the market, as many were already skeptical of the new economic measures.

On the other hand, production units reveal of its preparatory actions toward the new economic policy. Each factories and companies are submitting production indexes to the senior departments under the Cabinet and receiving evaluations according to its reports. Some factories are switching operations after obtaining outside capital, while other insolvent companies were closed down.

One example is Chongjin chemical factory. After forming a joint venture company with China, it was renamed to Chongjin Paper Production Factory. With over 3,000 employees, it will become one of the top three companies in the Chongjin area — after Chongjin Steel Works and Kim Chaek Iron Works.

UPDATE 17 (2012-10-15): The Daily NK offers a scenario for why an adjustment in agricultural production incentives have not been implemented: a bad harvest has forced policy makers to reconsider allowing the cooperative farms to keep so much of their produce. According to the article:

A Hyesan-based source explained today, “Cooperative farm cadres are saying that none of the experimental farms will be given 30% of their production this year because it has become difficult to meet the target. They are saying that the harvest is not good and they need to feed the military as a matter of priority, so first they’ll guarantee the military rice then give the rest to the farmers.”

A Shinuiju source corroborated the story, saying that the authorities “haven’t said they are going to take all the production from the farms, but nobody actually thinks they are going to get very much. People who trusted the official words are feeling quite stupid, and nobody is working very hard.”

Back in July, each province designated a number of ‘model farms’ that were to be used to test the policy. These farms were supposed to receive their initial inputs of fertilizer and machinery from the state, and then be given 30% of their production in return.

“They are saying that the state does not have enough rice right now and that there is no choice but to give it to the military, so please try to understand,” the source said. “Farm workers, many of whom had been buoyed by talk of food distribution, are really disappointed, especially since prices are sky high in the market these days.”

However, the Hyesan source also said that a lot of people are prepared to wait and see until at least mid December, when harvest processing concludes and distribution can be finalized. “People assume that Kim Jong Eun won’t want to disappoint the people in his first year in power,” he explained.

UPDATE 16 (2012-101-9): The Daily NK reports that North Koreans are confused about what has happened to the new economic policies that were under discussion:

The North Korean authorities originally began to announce news of the new economic system domestically in July, outlining increasing managerial autonomy, changes to payment systems and new farm procurement regulations. There were even some less detailed announcements on North Korea’s fixed line ‘3rd Broadcast’ system, which is used to disseminate propaganda handed down from the very top of the Party.

However, late last month signs of abnormality began to appear. Although few local people thought the measures would be publicly adopted at the extraordinary session of the Supreme People’s Assembly on September 25th, the source said they didn’t expect all references to the policy to disappear.

According to the source, cadres suspect that the authorities are not yet prepared to roll out the policy in practice. Many are not surprised; they say it was impractical to expect the policy to be executed in just three months, given that the July 1st Economic Management Improvement Measures of 2002 took nine months to come to fruition after a policy statement was first issued by Kim Jong Il on October 4th, 2001.

The surrounding economic conditions are far from ideal, also. Since the announcement of the new economic measures, North Korea’s markets have been facing hyperinflation conditions rooted in a sky-high Chinese Yuan exchange rate.

However, it is still considered unlikely that the policy has been cancelled altogether, since that would carry heavy consequences for regime legitimacy. Also, the authorities have advertised the policy to the international community in a number of stories (though not in the state media), and it would not serve the regime’s purposes to lie openly about this particular issue.

In addition, it is actually extremely rare for the authorities to cancel a policy after it has been announced under any circumstances; in any case, sources continue to report that those agencies charged with preparing the implementation of the new economic measures are still operational. The current status of factories is being assessed by units dispatched by the Party and the Cabinet is issuing new production targets. Some factories are pursuing outside capital, and work to consolidate under-performing enterprises is ongoing.

One example is Chongjin Chemical Works. Recently, the factory entered a partnership with a Chinese firm and changed its name to Chongjin Paper Factory. The factory is one of Chongjin’s three major Level 1 enterprises, and has a workforce of 3,000. However, it had actually been offline since the 1980s.

UPDATE 15 (2012-10-4): Following the failure of the rare second-session of this year’s supreme Peoples’ Assembly to address economic policies, Andrei Lankov stresses that analysts should not place so much importance on the SPA:

If history is any guide, a session of the SPA is not a place where new economic policies are declared. Even though there have been some exceptions to this rule, like for instance the promulgation of the 1984 Joint Venture Law. Admittedly, at that time, the SPA was more important because had the job of approving the economic plans of the state. Such plans are a thing of the past now, and economic pronouncements have become significantly less common at SPA sessions.

Over the last three decades, nearly all important economic measures were not introduced at SPA sessions, and as a matter of fact were usually not mentioned at all.

Good examples are provided by what were arguably the two most important economic measures introduced by the North Korean government since the death of Kim Il Sung in 1994 – the economic reforms of 2002, and the currency reform of 2009.

The ‘First of July Economic Management Improvement Measures’ of 2002 were much overrated in the foreign media at the time, but nonetheless constituted the most radical attempt ever undertaken to reform the North Korean economy by Kim Jong Il and his advisors. The reforms legalized many market activities, provided industrial managers with significant autonomy in decision making, and also increased state procurement and consumer prices to levels comparable to the black market at the time (for example, one kilo of rice before the reform was officially priced at 0.08 won, after the reforms the price had been raised to 44 won – a near 500-fold increase).

The 2002 reforms were soon rolled back, but what is important here is the fact that the world was to learn about the reforms not when they were first introduced in July, but some two months later, when some mentions of the reforms began appearing in official publications. This might sound strange to a Western reader, but measures that significantly changed the economic life of the country remained unreported by the official media for a significant amount of time (and indeed were never fully explained).

The currency reform of 2009 presents us with an even more striking example of a well-arranged complete media blackout. The reform itself produced the greatest economic and social upheaval in North Korea since the famine of the 1990s. The North Korean populace was suddenly told that the currency they held was now null and void, and could be exchanged for new notes in limited amounts (usually only to the equivalent of few months of official salaries). At the same time, the use of foreign currencies was banned, and markets and state-run shops were closed. For a few months in early 2010, even members of the Pyongyang elite experienced difficulties in getting their daily rice. According to foreign observers in Pyongyang, popular discontent was palpable and for a brief while, a violent collapse of law and order appeared possible.

This dramatic upheaval of course was completely ignored by the North Korean media; TV, radio and newspapers failed to mention the fact that retail trade was at a complete standstill and the fact that a currency reform was underway. All information was provided to the average North Korea through the cable radio network – officially known as ‘radio number 3’, as well as through confidential letters sent to petty officials and bank clerks. North Korean media outlets also sometimes mentioned the currency reform – of course whilst extolling its alleged virtues – but in the domestic media references to the reform were a complete taboo.

UPDATE 14 (2012-9-28): The Daily NK reports that in addition to agriculture and industrial policy adjustments, it appears that the DPRK is planning to reorganize, “rationalize”, and possibly close, many state owned enterprises:

The central authorities are planning to merge uncompetitive factories and enterprises with stronger ones as North Korea prepares to embark on the full implementation of the so-called ‘June 28th Policy’, Daily NK has learned.

This process is being undertaken to give those enterprises that remain the best chance of competing under the new rules that are due to enter force in the coming days.

An overseas Chinese trader explained the situation to Daily NK on the 27th, saying, “A whole bunch of traders who were in China on business trips started rushing back to North Korea. They had heard that the authorities planned to rationalize the number of small and medium size enterprises so they headed back in a hurry to investigate for themselves.”

“The word is that they are going to get rid of those enterprises that don’t turn a profit for the people and aren’t helpful to the development of the country. A lot of these workers are getting calls from their companies and going back,” the source went on. “It’s meant to be about getting rid of weak and loss-making enterprises in advance of bringing in the new economic improvement measures.”

The latest moves form part of a process that began in mid-July, when Central Party teams made up of personnel from the department of the State Planning Commission responsible for production facilities, their provincial equivalents and the Central Prosecutors Office were dispatched to the regions to assess the state of existing production facilities. At that time, Daily NK reported that “Because it’s an inspection of production facilities, managers in charge of those facilities have also been called in [by the inspection teams].”

According to a second source, employees from companies slated for elimination are to be reassigned to the company merging with them. He explained, “Rather than simply get rid of enterprises and factories, they are trying to either merge them with bigger companies or with companies in the same sector.”

Although workers assigned to unproductive enterprises are understandably keen to move to a company with even a modest amount of potential, the state of the broader North Korean economy has nevertheless put most in a state of ‘50% anticipation, 50% fear’ over what will come next. At the time of writing, the price of rice has reached an outlandish 6700 won/kg even in Pyongyang itself, while also arriving at 7000 won in Onsung County and 6500 won in Hyesan, putting those people without foreign currency in a very difficult situation.

Another major problem is that while the official aim of the policy is to retain only those enterprises that are capable of implementing the tenets of the June 28th Policy effectively, only around 30% of North Korean enterprises are fully functioning, which means that there are around 70% in an uncompetitive condition. Therefore, it seems inevitable that some uncompetitive enterprises will have to be kept, and these are likely to be a drain on the economy in the short to medium term.

Not only that. In the words of the source, “For the workers from weak companies the opportunity to work for a bigger company in a better atmosphere is pleasing, but they also know that economic changes have never succeeded in North Korea, and in fact have periodically made things worse.”

UPDATE 13 (2012-9-23): The Associated Press (via Washington Post) offers on-the-record accounts by farmers in the DPRK talking about agriculture reforms:

North Korean farmers who have long been required to turn most of their crops over to the state may now be allowed to keep their surplus food to sell or barter in what could be the most significant economic change enacted by young leader Kim Jong Un since he came to power nine months ago.

The proposed directive appears aimed at boosting productivity at collective farms that have struggled for decades to provide for the country’s 24 million people. By giving farmers such an incentive to grow more food, North Korea could be starting down the same path as China when it first began experimenting with a market-based economy.

Two workers at a farm south of Pyongyang told The Associated Press about the new rules on Sunday, saying they were informed of the proposed changes during meetings last month and that they should take effect with this year’s upcoming fall harvest. The Ministry of Agriculture has not announced the changes, some of which have been widely rumored abroad but never previously made public outside North Korea’s farms.

Farmers currently must turn everything over to the state beyond what they are allowed to keep for their families. Under the new rules, they would be able to keep any surplus after they have fulfilled state-mandated quotas — improving morale and giving farmers more of a chance to manage their plots and use the crops as a commodity.

“We expect a good harvest this year,” said O Yong Ae, who works at Migok Cooperative Farm, one of the largest and most productive farms in South Hwanghae Province in southwestern North Korea. “I’m happy because we can keep the crops we worked so hard to grow.”

…

At cooperative farms across the country, the government doles out fuel, seeds and fertilizer, and farmers pay the government back for the supplies, said Kang Su Ik, a professor at Wonsan Agricultural University.

The farmers’ crops go into the Public Distribution System, which aims to provide North Koreans with 600 to 700 grams of rice or cornmeal a day. However, a persistent shortfall of more than 400,000 tons a year in staple grains has meant lower rations all around, according to the United Nations, which has appealed for donations to help North Korea make up for the shortage.

Under the previous system, each farmer could keep as much as 360 kilos of corn or rice a year to consume or sell at the market, in addition to what they grow in their own courtyards. The rest was turned over to the state to distribute as rations, Kang said.

The proposed changes would reverse the equation, challenging farmers to meet a state quota and then allowing them to do as they wish with the rest, including saving it for themselves, selling it at the local farmer’s market or bartering it for other goods.

Farmers also would have more control over tending their plots. At Migok, 1,780 farmers work in teams of about 100. In the future, sub-teams of about 20 to 30 farmers are expected to have more say in how to tend their crops, said Kim Yong Ae, who oversees the visitor’s center at Migok, where a patchwork of rice paddies stretches as far as the eye can see.

…

O, who lives with her rice farmer husband and two young sons in Migok’s Apricot Village, brightened up when she said the family expects a surplus this year. Migok was unaffected by the summer rains that destroyed farmland elsewhere in the country, and their private garden is bursting with fruit trees, vegetables and marigolds.

Still, she said they would probably donate their extra rice to the state anyway — an offering known in North Korea as “patriotic rice.”

UPDATE 12 (2012-9-19): The Korea Herald reports that Pyongyang is planning to loosen its control over some state-owned enterprises.

North Korea is moving to introduce a full-scale cash-payment system for transactions among light-industry state firms in the latest apparent move to revamp its planned economy, a source in the communist state said.

The measure, seen as aimed at boosting industrial efficiency by ensuring greater autonomy for non-backbone businesses, could pose risks by loosening the long-standing state control, analysts say.

The adoption of cash transactions marks a departure from the long-held “scriptural-money” system in which each firm uses an account in the central bank when it transacts with others to secure raw materials, electricity, machines and other means of production.

Cashless transactions were a useful tool for the authoritarian regime to keep track of the currency flow and companies’ business activities. Cash payments risk weakening state oversight, experts noted.

In its economic reform of July 2002, Pyongyang partially introduced cash transactions among companies in a controlled production-material exchange market. But the new measure seeks a full-scale adoption of cash payments, the source said.

…

“The change means a collapse of the long-held system in which the authorities provide all means of production to each firm. Kim Jong-un has no other option but to push for the urgent task of reviving the economy.”

The North is expected to apply the cash-payment system mostly to provincial firms that produce consumer goods, while keeping the old system for military, heavy-industry and chemical firms to keep its control over the strategically vital ones, the source said.

News reports suggest that the North will offer to each firm an “initial investment” to cover their production costs and allow each to determine its production items, price and selling methods.

The seemingly greater autonomy, however, reflects the degree of the North Korean authorities’ inability to sustain the planned economic mechanism with sources of external assistance seriously limited amid deepening isolation.

Experts are skeptical of the measures to give more autonomy to companies whose overall operation rate is said to stand at around 20-30 percent because of the regime’s failure to provide necessary means of production.

“At any rate, companies in the North are suffering with their operation almost at a standstill. The North, through the measure, aims to normalize their production function by offering more autonomy in their management,” said Kwon Young-kyong, professor at the state-run Institute for Unification Education.

“But the state has little cash (for the initial provision of capital to kick-start the firms). We still have to wait and see how the measure will unfold.”

Kim Joong-ho, senior researcher at the Export-Import Bank of Korea, also painted a negative outlook for the cash-payment scheme, underscoring that the North should first establish the necessary financial and monetary infrastructure.

“North Korea’s currency is now seen as a scrap of paper (due to a poorly managed currency value). Using cash is workable when there is trustable, stable financial, currency management apparatus. Thus there remain problems of practicality and efficiency,” he said.

“As evidenced in the 2009 devaluation of its currency, North Korea’s cash has lost its function to store fiduciary value. Meanwhile, people have also experienced the benefit and power of foreign currency, particularly Chinese yuan.”

The devastating currency reform three years ago was aimed at stemming the spread of marketplaces, which became rampant as the food rationing system failed to function following the severe famine, dubbed the “Arduous March,” in the mid-1990s.

Like other socialist states, North Korea has maintained a dual payment system ― cash in the form of monthly wage for regular people and scriptural money for inter-company transactions.

Scriptural money is aimed at preventing the state’s non-cash resources allotted for each firm from turning into cash, flowing into the household sector and complicating its control of the currency and overall economic activities.

The dual system has been crumbling as more firms use cash to secure means of production while the overall economic system is on the verge of collapse with the regime running out of monetary and material resources to maintain the planned mechanism.

What is crucial for its economic reestablishment, experts say, is that the North first establish a banking system, through which people can confidently store their wealth, with companies benefitting from the financial system through stable investment and other methods.

The North is set to hold a rare session of the rubber-stamp Supreme People’s Assembly next Tuesday during which some observers expect Pyongyang to announce new laws for its overall economic reform.

The level of the North’s possible reform is hard to predict, experts say, stressing that Pyongyang has repeated a pattern of employing what appear to be reform measures only to retract them when they were deemed to pose a threat to the dynastic regime.

Pyongyang’s desire for economic reform has been detected in a flurry of recent media reports and academic documents.

The front page of the Tuesday edition of the Rodong Sinmun, the daily of the North’s ruling Workers’ Party, was filled with economy-related articles while pushing the article on Kim Jong-un, first secretary of the party, to the second page ― an exceptionally unusual article arrangement.

Last month, the North introduced a set of research papers by its scholars concerning topics ranging from the state control over the financial sector to the importance of currency circulation. They raised the prospect for possible financial reform.

The paper by Kim Un-chol, professor at Kim Il-sung University, said, “The country should strengthen state control over the financial sector to achieve a more stable economic development.”

UPDATE 11 (2012-9-10): Kim Kwang-jin reports in the Daily NK that the 6.28 policies will go into effect this October:

One of a number of sources inside North Korea confirmed to Daily NK over the weekend, “We have been told by the authorities that the economic management improvement measures known as the ‘6.28 Policy’ will be implemented from October 1st. They said in lectures delivered in enterprises and people’s units that the policy will be implemented along fixed legal and systemic lines.”

Given that the new measures will be implemented on October 1st, it is likely that the June 28th Policy will come to be known as the ‘October 1st New Economic Management Reform Measures’ in the same way as the July 1st Economic Management Reform Measures of 2002, which were branded the ‘October 3rd Policy’ until their implementation because October 3rd was the date upon which Kim Jong Il delivered his first statement on the issue to the Party.

The ‘June 28th Policy’ is seen by many analysts as an extension of the 2002 measures. Among its key tenets, agricultural producers are to receive 30% of production under the state plan plus any overproduction, while workers in small and medium-sized enterprises are to no longer receive state distribution, instead being paid entirely in cash.

However, the people of North Korea are concerned, the source explained, saying, “The truth is that they shut down the July 1st Measures after just 3 years, so people are feeling pretty anxious now.” Therefore, he added, “They are backing it up with legal measures to show that it will be applied consistently.”

The source explained that he assumes the authorities are using both education targeting all levels of the adult population and the application of legal and systemic modifications to try and ensure that the tentatively titled ‘October 1st New Economic Management Reform Measures’ succeed. However, if they are not followed by significant opening to the outside world and/or massive levels of external support, the source added that the chances of success will significantly diminish.

UPDATE 10 (2012-9-8): Andre Lankov argues that Pyongayng will take a stab at currency reform:

In late August, Kim Eun-chol, professor of economics at Kim Il Sung University, the country’s leading school, published a paper in which he emphasized the government’s duty to keep money supply under control. In July, North Korea’s major economic journal also stated that the amount of cash in circulation should be controlled by the state-run banks – for the sake of “further improvement of people’s living standards”, of course.

Taking into consideration how North Korean society is arranged (and the highly sensitive nature of the topic), one can be certain that neither publication reflects intellectuals’ pursuit of free, inquisitive minds, but rather hints at the ideas of Pyongyang decision-makers.

So, should we be prepared for another currency reform? It is too early to say, since there are valid argument both for and against such a dramatic action.

Like most communist countries, North Korea has an illustrious history of confiscatory currency reforms, the most recent of which occurred just three years ago. Currency reforms with “socialist characteristics” usually follow a similar pattern: One day, the lucky residents of the country where the reform is to take place are informed that their legal tender will, in a couple of days or weeks, become worthless and that only a limited amount of what they hold will be changeable into the new currency. Deposits in state banks are usually treated more leniently, but the exchange period is short and the average citizen finds himself facing numerous problems even when trying to exchange cash within the established tight limits.

In essence, such reforms lead to the nearly complete annihilation of privately held cash deposits and the dramatic decrease of money supply in the economy. Legal and semi-legal businesses within the private sector suffer most – many of them face bankruptcy. But such reforms help to curb inflation and reinforce the state’s leading role in the economy.

The last time the North Korean government implemented such a reform was in late 2009 (previous reforms took place in 1992, 1978 and 1959). However, the 2009 reform seemed to fail spectacularly to achieve its main putative objectives.

There were good reasons for this failure. Driven by rather obscure logic, North Korea’s state bankers decided that employees of state enterprises (that is, the vast majority of workers, at least on paper) would receive exactly the same nominal amount for their work. In other words, if say a steel worker received 3,000 won before the currency reform (a price of 1 kilogram of rice at the time), he would receive 3,000 won in the new currency as well. At the same time, the exchange rate of old to new currency was 100:1, so the plan was that the new wage would suffice to buy 100 kilos of rice. This amounted to an overnight 10,000% increase in wages and in effect a 10,000% increase in the money supply.

This policy unleashed an outbreak of rapid inflation and predictably, within less than a year, prices had returned to pre-reform levels. One can only wonder why reform planners failed to anticipate such a turn of events.

At the same time, the 2009 reform led to dramatic confrontations within North Korean society. Many private businesses were indeed hit hard, but the turmoil of late 2009 and early 2010 produced popular dissatisfaction on a scale unseen in North Korea since the late 1940s.

For a brief while, in January and February 2010, a major outbreak of public discontent seemed to be within the limits of possibility. It took special efforts to pacify the public (according to unconfirmed rumors, some top officials were made scapegoats and executed). It seems in fact that the authorities realized their mistake and for a brief while decided to leave the market and its traders alone.

But recent publications emanating from the North Korean propaganda apparatus seem to suggest that the idea of a currency reform has become a politically attractive policy measure once again. One should not be misled by the ostensibly “academic” credentials of the journals in which the articles on currency reform appeared: There is no such thing as independent academic research in North Korea when political economy is involved. This as an indication that reform is being prepared, or at least seriously discussed, in some quarters of the elite.

It seems that North Korea’s elite is worried about inflation, which has over the past two years been increasing steadily. Last summer, the average exchange rate was 2,500-3,000 won to the US dollar, while a kilo of rice would cost about 2,100-2,400 won. By last month, the exchange rate had topped 7,000 won to the dollar and the price of a kilo of rice was 6,000 won. In other words, within a year, prices nearly doubled while the won lost half of its value.

For North Korea’s decision-makers, this is clearly a worrisome trend. It might be even more dangerous because policymakers seem to considering economic reorganization, maybe even genuine economic reform. But an annualized inflation rate of 100% is not a great place to start a transformation, and something has to be done to curb this dangerous trend.

Since currency reform is a staple of government policy in North Korea, it has become a well-known and well-tested economic control measure. Therefore it is only natural that the top managers of the state economy are keen to launch a currency reform.

That said though, currency reform is a very risky thing. In 2010, in the aftermath of the 2009 reform, even North Korean officials sometimes spoke critically about the reform when talking to Western diplomats. Foreign students studying in Pyongyang were approached by North Korean students who expressed their angst about the currency reform. A military attache of one Western country (not exactly friendly from the North Korean point of view) told me that his opposite number said Pyongyang “doesn’t quite understand what it’s doing”. One can imagine how angry a military intelligence officer in one of the world’s most controlled societies has to be to share his frustration with an imperialist outsider.

The level of annoyance was truly unprecedented. For a brief while, in January and February 2010, a public disturbance, if not a revolution, appeared to be possible. It is not incidental that immediately after the reform, the Chinese – hitherto very careful when it came to North Korean issues – began to speculate almost openly about the possibility, probability and even inevitability of regime collapse in North Korea.

Therefore North Korea’s decision-makers are now facing a difficult choice: If inflation is left unchecked, it may well undermine their efforts to stabilize and transform the economy while also leading to popular discontent. On the other hand, another currency reform might provoke an outbreak of popular discontent on a hitherto unthinkable scale.

Reform clearly constitutes clear political risks, but judging by recent news, some people in the top leadership are desperate enough to consider the option again. It remains to see whether they will follow through on their words, and whether they will survive their experience.

UPDATE 9 (2012-9-4): Andrei Lankov, long a skeptic of the viability and possibility economic “reform” in the DPRK, wrote this article in the Washington Post and sent out these comments via email:

As some of you might know, I have recently published a piece at the ‘Washington Post’ where I outlined what seems to be going on in and around North Korea. However, stylistic requirements and various conventions precluded me from being quite as blunt as I would be in person.

Yesterday, when participating at an online discussion, I wrote a rather lengthy paper where the (essentially) same points were spelled out more bluntly. After some considerations I decided to send this letter to you, highly esteemed friend and colleagues.

• It seems almost certain that Kim Jong Un (and some people around him) really want to change things. There are too many signals, coming from too many directions to deny the fact that North Korea has begun to change, and as a matter of fact, with almost alarming speed. None of these signals in isolation are conclusive, but when taken together they little room for doubt.

• The ideal destination for Kim Jong Un, Chang Song Taek and co. is of course a Chinese-style ‘developmental dictatorship’. They want to build a North Korea which will combine an authoritarian political structure (presided over by them, needless to say) with a market economy (where the commanding heights will belong largely to the scions of the elite).

• For the outside world and for the average North Korean, the emergence of such a regime is clearly a welcome development. It will keep its nuclear weapons, but will be less willing to engage in provocative behaviour – like proliferation. North Koreans will still live under a dictatorship. But this dictatorship will necessarily be less repressive, giving people more individual freedom. And last, but not least, such a regime will deliver a dramatic improvement of living standards for almost everyone in the country

• Currently, the reforms are reversible. Kim Jong Un can change his mind or be overwhelmed by the conservatives. Nonetheless, I personally do not believe that backlash is very likely. The boy badly wants to make everybody happy.

• At the same, the above mentioned outcome – the emergence of a relatively stable, and economically successful developmental dictatorship in North Korea – is possible, and desirable, but not particularly likely to happen. As I have written countless times, Kim Jong Il did not council reforms because he always understood: in a divided country with such a huge economic divide between North and South, reforms are likely to become destabilizing. South Korea’s existence is the major reason why a developmental dictatorship in North Korea could not remain stable. These fears are seemingly not shared by Kim Jong Un and his advisors, but this does not mean these fears are unfounded.

• The probability of the success of reforms (‘success’ as defined as a stable and growing developmental dictatorship) appears even more problematic if we look at Kim Jong Un’s personality and his actions over the last few months. To cut to the chase, the fat boy is stupid. He does many things which are completely unnecessary and are potentially destabilizing. He should not endorse the American pop culture, and Micky ‘The Imperialist Rodent’ Mouse; he absolutely should not turn the front page of Rodong Shinmun into his wedding album (section on honey moon).

• Therefore, we should be ready for trouble. A reforming North Korea will likely be very unstable and might collapse. Worse still, collapse is likely to come with little to no prior warning. Media reports about reform are likely to produce the false and dangerous idea that North Korea is solving itself as a problem. This may just be the case, but it is much more likely not to.

• The coming crisis is likely to be violent and is fraught with many potential dangers. Among other things, it may provoke unnecessary confrontation between the US and China, it might also increase the possibility of proliferation. In short then, it is not going to be nice. Probably, the North Korean problem has never had a nice quick solution. The story was going to end badly anyway, however in light of recent changes, the ugly end seems to be closer than we expected…

Those are my politically incorrect and undiplomatic remarks.

UPDATE 8 (2012-9-4): This Daily NK article points out how past reforms led to improving economic conditions…which led the state to move in and expropriate the assets and dissuade individuals from partaking an .anti-socialist activities”. This would imply that any economic reform will not immediately bear fruit because people will not believe the policy is durable and investor horizons will be short.

UPDATE 7 (2012-9-4): The Asahi Shimbun reports that the 70/30 split in output that the state will offer collective farms (see below) will also apply to industrial organizations:

“(State-run enterprises and shops) will be allowed to reserve 70 percent of their profits, and 30 percent will go to the state,” said one North Korean government source.

…

“The authorities plan to start with (reforming) small enterprises this time to avoid a recurrence of the problems encountered [in 2002],” the researcher said.

UPDATE 6 (2012-8-31): The Daily NK reports that worries about the new 6.28 policies are causing a depreciation of the North Korean won and a rise in inflation:

The Chinese Yuan-North Korean Won exchange rate is exceedingly volatile these days even by North Korean standards.

Having struck a high point of 1300 North Korean Won on the 27th, a 44% rise over the rate the previous week, by the afternoon of the 30th the exchange rate had lost some of that value, falling back to 1100won. Nevertheless, 1100won is still extremely high; the price of Yuan only topped 1000won on the 27th, though it subsequently fell back.

In line with the rising exchange rate, rice is currently selling at very high prices; approximately 6500 Won in Hyesan, Yangkang Province yesterday. This is a huge increase; from 3000won/kg at the beginning of June to 4000won/kg at the beginning of August.

According to a source from the city, people cite the introduction of new economic management measures as the cause.

“People know that when new economic measures get announced, the prices of goods skyrocket,” she explained. “Among the economic measures there is both a dramatic rise in wages and the raising of prices to realistic levels, and as people are now learning about those so rice keeps going up.”

As a result of the rising price of rice, sellers are concerned at losing out even if they do sell, while buyers are leery about buying, preferring to fall back upon corn, which is 50% cheaper on average. As a result, sales of rice are flat.

The reason why news about new economic measures is able to inspire such volatility is that high rates of inflation also occurred on previous occasions when economic measures were implemented, noticeably the July 1st Economic Management Reform Measure of 2002 and the currency redenomination of November 2009. At this point, the source noted, people’s fears about the ‘June 28th Policy’ are greater than their expectations.

UPDATE 5 (2012-8-28): North Korea Intellectual Solidarity reports that monetary and financial institutions and organizations are being shaken up. According to Yonhap:

“North Korea is reinforcing the status of its central bank, while working on weakening the power of banks controlled by the military and the Workers’ Party of Korea,” a source familiar with the North told Yonhap News.

NK Intellectual Solidarity, a Seoul-based defectors’ group, last week reported Pyongyang is preparing a new economic organization with finance and accountant experts driven by the Cabinet, from earlier this month.

UPDATE 4 (2012-8-22): The Korea Herald reports on recent leadership changes:

Reports from state media show that the regime has promoted or reinstated in recent months the four technocrats who played a key role in an unsuccessful economic reform a decade ago ― Park Bong-ju, Ro Do-chul, Kwak Pom-ki and Chon Sung-hun.

Most significantly, Kim in July dismissed Ri Yong-ho, the military’s powerful general staff chief and one of Kim Jong-il’s closest aides. The National Intelligence Service ascribed the removal to his “uncooperativeness” toward the young Kim’s tighter reins over the military.

“Seizing control of the military, Kim is forecast to pursue a drastic economic reform and openness such as permitting private profit making in trade and commerce, expanding autonomy for businesses and reducing the basic unit of production in cooperative farms,” said Cheong Seong-chang, a senior research fellow at the Sejong Institute.

In July 2002, the so-called Big Four tried to relax the rigid command economy by dissolving the rationing scheme, allowing street markets, raising wages and prices and adopting incentives and graded compensation.

But the regime rolled back the ambitious program in the mid-2000s as it hiked prices and magnified the pains of the populace, instead of buoying markets and improving productivity. The technocrats were consequently demoted or disappeared from sight.

The North’s Supreme People’s Assembly last week reinstated Chon Sung-hun as a deputy premier. He was dismissed from the post in April 2009 but reportedly put back as metal industry minister in January this year.

Park Bong-ju, a symbol of economic reform, returned to the government in August 2010 and was elevated to light industry minister in April 2012. He served as prime minister from September 2003 to April 2007.

Ro Do-chul is one of the 11 vice premiers and has been serving Kim since he was designated as successor in April 2009. He also accompanied Premier Choe Yong-rim on his trip to China in November 2010, which was aimed at expanding bilateral economic cooperation.

Kwak Pom-ki is a former machine-building industry minister and maintained the deputy prime minister position for more than 11 years until June 2010. He became the Workers’ Party’s chief secretary of South Hamgyeong Province in April this year.

With the grand comeback, the four officials are expected to steer economic policymaking in line with Kim’s fresh guidelines unveiled on June 28.

Some observers even say that their reinstatement may help thaw frozen cross-border ties given their experience in inter-Korean projects. Chon visited Seoul in 2007 as head of the North’s delegation for a joint committee on economic cooperation, while Park led an inspection team that toured the South in 2002.

But the fundamental question is: Will it be different this time?

“It seems that a change is in sight from North Korea’s inner part,” said Chin Hee-gwan, a unification professor at Inje University in Gimhae, South Gyeongsang Province.

“I’d call it Kim Jong-un’s cultural revolution ― Kim is heavily focusing on the people’s livelihoods; and he is apparently interested in musical performances and public and cultural facilities among others.

“I was shocked and surprised watching Choe Ryong-hae, director of the General Political Bureau, walk around and inspect a theme park. Though things like Kim’s ‘musical politics’ or the June 28 measures are not entirely new and have been tolerated under the surface, it’s notable to see them institutionalized and nurtured.”

The regime appears to be phasing out its decades-old rationing system in favor of the so-called June 28 measures, which promise greater autonomy to farmers and businesses.

…

While acknowledging positive signals, experts caution against overanalyzing every move made by the unpredictable country.

“Both this personnel reshuffle as well as some other bureaucratic developments suggest a renewed interest in economic development as a policy goal,” said Marcus Noland, a deputy director and senior fellow at the Peterson Institute for International Economics, via email.

“One can make up reasons why things might be different this time: Kim Jong-un is more willing to pursue reforms than his father was; the people involved in the 2002 reforms learned lessons of at least what not to do; after 10 years of frustration, China will be more willing to help if North Korea shows some willingness toward change. (But) the proof of the pudding is in the eating.”

Brian Myers, an associate professor and chair of the international studies department at Dongseo University in Busan, pointed out that the hints have yet to bring about a fundamental policy shift toward economic reform.

“A lot of what Kim Jong-un is now being credited with was started under Kim Jong-il,” he told The Korea Herald via email.

“For fifteen years now the regime has been trying desperately to reconcile economic change with political changelessness. And the virtual impossibility of that task means we will continue seeing people get purged and reinstated, policies stopping and starting.”

UPDATE 3 (2012-8-16): Kim Kwang-jin writes in the Daily NK that certain state-owned enterprises will be ending certain forms of non-cash compensation for employees and moving towards purely monetary wages.  According to the article:

A source from North Hamkyung Province revealed the news on the 15th, saying, “According to a Central Party policy that was conveyed to us on the 8th, the system of food distribution for the workers in some factories and enterprises is going to be abolished, and all distribution to them will then be made in the form of wages. The system of distribution for those work units under the state plan will be retained as-is, while only those units that are self-sustaining will move to a system of wages only.”

“Those units that are losing their food distribution system will receive big wage increases,” the source added. “However, it seems that there will be differences from factory to factory and even from job to job.”

North Korean enterprises are divided into eight levels, ranging from level one to level eight with a class of ‘special level’ enterprises as well. Each enterprise receives this designation based on an assessment of things including its role in the economy, productive capacity and size of workforce. Larger enterprises all fall between ‘special level’ and ‘level 3′, and are affiliated with the central authorities.

Those operating outside production plans ordered by the center have had the authority to deal with production and distribution autonomously since the 1970s. This self-sustaining system was designed to provide an incentive to produce, but also allowed the state to forgo responsibility for providing food and daily necessities by passing it on to provincial level entities.

This includes smaller light industrial enterprises with between 50 and approximately 500 employees between level 4 and level 7, and some workers in larger enterprises who are employed solely in the pursuit of tasks that are designed to earn money for the factory itself.

The fact that only ‘self-sustaining system’ factories or individuals within larger enterprises will move to this ‘all-wage system’ presents a threat to hopes of significant reform in North Korea. Indeed, the plan appears only to strengthen measures that first appeared as part of the July 1st Economic Management Reform Measure in 2002.

One defector who previously worked in one of North Korea’s ‘special level’ enterprises told Daily NK, “Take away military factories and most workers in major state enterprises, then the number of people working under the self-sustaining system is not large. Looked at as a percentage of the total production of all North Korean enterprises it cannot be more than 10% and it can’t be more than 20% of all workers, either.”

The source further reported that news of the measure is not impressing workers on the ground.

“I spoke to someone in Onsung County, and he told me that they are reviewing a 600% pay rise to replace food distribution. So, someone previously getting 2000 won would get 12,000 won, but that is still less than the price of 3kg of rice,” the source pointed out.

Another problem facing the new policy is the disharmony likely to be caused in enterprises where both types of employee is present, meaning that some will get food distribution while others will not.

Andrei Lankov writes an interesting article on the history of the DPRK’s rationing system.

UPDATE 2 (2012-7-24): Kim Kwang-jin writes in the Daily NK that the DPRK is carrying out inspections of complex enterprises (련학기업소) in preparation of the 6.28 Policy (described below):

The North Korean authorities have dispatched Central Party inspection teams to assess the state of production facilities at each factory enterprise in North Korea prior to the implementation of the ‘6.28 Policy’, the name for planned economic reform measures set to go into effect in October

A source from North Hamkyung Province revealed the information to Daily NK on the 23rd, explaining that the teams are made up of officials from the department of the State Planning Commission responsible for production facilities, their provincial equivalents and the Central Prosecutors Office. They are now in the process of assessing the production facilities at each factory enterprise.

The source said, “It’s a Central Party investigation of each factory enterprise before they bring in the new economic measures,” adding, “Because it’s an inspection of production facilities, managers in charge of those facilities have also been called in [by the inspection teams].”

Daily NK has obtained confirmation from other sources that the same types of assessment inspections are ongoing in both Hyesan in Yangkang Province and Shinuiju in North Pyongan Province.

The Central Party inspection teams are expected to follow-up their assessments by deciding what needs to be scrapped and what can be salvaged and reactivated, then reporting it all back to the State Planning Commission in order for decisions to be made on state investment.

The 6.28 Policy, or ‘On the establishing of a new economic management system in our own style’, should see 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.

UPDATE 1 (2012-7-20): Writing at the Daily NK, Kim Kwang-jin writes about the implementation of a trial of the 6.28 policy:

A source from Yangkang Province told Daily NK today, “They have handed down the new policy to cooperative farms in Daehongdan, Kim Hyung Jik County [formerly Huchang County] and Kim Jong Suk County [formerly Sinpa County). They are providing new seed varieties, fertilizer, weeding implements and what-have-you, and say they will give 30% of the grain to the farmers.

“The state will take 70% of the target production and the farmers will get 30%, but if the farmers exceed the target then they get to keep the surplus,” the source then clarified, before adding a caveat, “Obviously, the key is the standard according to which the authorities set those targets.”

“The farmers in the three counties are excited about it now that they have heard that they will be able to get 30% of the production and even the surplus as well. So much so that they think some people who left for the cities will come back to the area,” he noted, adding that in Kim Jong Suk County they are already bringing in new agricultural machinery, which is being described as coming from Kim Jong Eun.

If the policy is implemented as stated, then the amount of production going to farmers should rise. This will be a welcome change for most; the Chosun People’s Army took direct responsibility for the management of food procurement and distribution during the food insecurity and famine of the 1990s, and this invariably left the farmers themselves with a vastly reduced share.

However, it is not just internationally that concerns over the viability of the measures being implemented are being raised.

Local people are not yet prepared to trust the authorities either, following a history of disappointments such as the 2009 currency redenomination. In consequence, many are reportedly looking upon the latest policy with skepticism; many expect the authorities to break their promises in one way or another, for example by taking more than 30% of production in order to feed the military.

“In 1985 I went to Kim Jong Suk County and tested some changes like this for myself,” Lee Min Bok, who was once an agricultural researcher in North Korea, explained, before emphasizing, “For as long as they don’t move to a fully private farming model it is very hard to imagine that they will improve production or obtain a significant surplus.”

ORIGINAL POST (2012-7-20): In the article below the Daily NK does a great job of explaining the purpose of the rumored new "6.28 Policy" on agriculture as well as the problems the state continues to face in trying to maintain a state-controlled collective agriculture and rationing system in concurrence with a growing "private"-market infrastructure. According to the article:

According to an inside source, the authorities recently notified local organs of the so-called ‘6.28 Policy’, which is entitled, ‘On the establishing of a new economic management system in our own style’.

The agricultural element of the policy, which is to be implemented in October, will reduce the size of the basic farming unit and bring state agricultural procurement prices up to 'realistic' levels.

In more detail, the plan will see the following measures implemented: ▲ the so-called “bunjo danwei” (the basic farming unit on a cooperative farm) will come down from its current scale of 10-25 members down to 3-4 members; and ▲ the state will procure its quota of production at market prices and deduct the cost of inputs; then, as is nominally true now, ▲ the unit which produced it will be free to deal with the remainder as it sees fit. Land and other inputs will be provided by the state.

According to Kwon Tae Jin of the Korea Agricultural and Rural Research Institute, the North Korean authorities are hoping that, “[The unit downsizing and realistic procurement pricing structure] will give each agricultural unit the motivation to produce and will cause overall state food production to rise, all while not destroying the fundamental cooperative agricultural method.”

Under the existing agricultural management system, provincial Agricultural Management Committees set output targets then submit them to the Ministry of Agriculture for approval. Once they have been approved, each production unit is handed down a quota. Thereafter, the value of inputs, land usage fees and other non-tax payments such as “military support” are deducted from production, and the producing unit is given the right to distribute the remainder as it wishes.

However, according to defectors with farm management experience, because the state sets prices for the inputs too high and procures unrealistic amounts at nominal fees, the leftover for the farmers themselves is usually highly inadequate.

Although realistic procurement pricing therefore sounds good for farmers, there are many seemingly insurmountable problems, If procurement starts happening at market prices rather than the minimal prices at which it occurs now, then distribution also has to happen at market prices or the state will not be able to cover its costs. But if wages for urban industrial workers are not raised to realistic levels then they won’t be able to afford the food, and the system will not work.

Conversely, if the food were to be sold at a subsidized price by the state, then the system wouldn’t last long because the state would be unable to sustain the budget deficits that this would entail.

The system will ultimately drive inflation, which will undermine the procurement pricing structure, forcing the authorities to either pay more for everything or to pay less than market prices. The latter would then drive producers to hide production from the state in order to get higher prices on the open market.

One defector who was a cadre with a farming management committee in North Korea pointed out to Daily NK that this was what happened before, when “in the mid- to late-2000s when the government was buying food at above state prices, farming regions lived more comfortably than urban areas. However, after a couple of years the state stopped being able to pay, and the measure fizzled out.”

One important aspect of the 6.28 policy that is unexplored in the article is the reduction of farm labor units to 3-4 people.  This is tantamount to reducing work team units to single families. If individual families know that financial remuneration for their efforts on the cooperative farms will be captured entirely by the family unit (rather than by being split up among 2-4 families in the same work unit) they may be less inclined to shirk their labor responsibilities on cooperative farms.

One aspect of the DPRK’s agriculture “reforms” that I am interest to know more about is the effect of land rezoning on collective farm output. Access to enough data to do a scientifically rigorous regression is of course not possible, so those of you who have regular access to defectors and family members in the DPRK, please ask about the effects of land rezoning to village production in the DPRK. We should be able to get some good anecdotes on this anyhow.

This previous post on the DPRK’s agriculture policies is also interesting.

Read the full Daily NK story here:
North to Try Weak Agricultural Reform
Daily NK
Jeong Jae Sung
2012-7-11

This entry was posted on Wednesday, September 19th, 2012 at 11:40 am and is filed under 6.28 Policy on Agriculture (June 28), Agriculture, Fiscal & monetary policy, Food, Ministry of Agriculture. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.