North Korea’s ‘New Economic Management System’: Main Features and Problems

Korea Focus
Park Hyeong-jung
Senior Research Fellow
Korea Institute for National Unification

Here is the summary/assessment:

The objective of the New Economic Management System in North Korea is the building of an “unplanned socialist economy,” or something similar to the “socialist commodity economy” China implemented between 1984 and 1992. Agricultural, industrial and financial measures that North Korea is trying to introduce along with the installation and expansion of special development zones under the New Economic Management System are mutually connected and therefore need to be simultaneously implemented.

North Korea has the conceptual blueprints for each economic measure and its leadership includes individuals who are interested in promoting the areas where they are specialized. However, the country apparently lacks the capabilities to create the proper economic and political conditions for these measures. Against this backdrop, production increase and overall economic growth cannot be expected and confusion would intensify.

North Korea had not made sufficient preparations economically and politically before the introduction of the New Economic Management System. Introduction of new measures inevitably affects the interests of those who had been active under the old system. Transitional imbalance may arise in the process of putting the new system into practice. Reserve resources are necessary to address such problems.

The sub-unit management system in the agricultural sector showed how the reform effort can be stymied. This new system spurs independent efforts of farmers and stimulates their motivation for production increase but it invited the resistance of agricultural bureaucrats. When the state and farmers begin to share products by a ratio of 7:3 instead of the previous ratio of 9:1, imbalance will emerge somewhere in the distribution of farm products. Reserve resources are necessary for such a sudden change. The same is expected of the industrial management system. Factory enterprises were given autonomous operation rights but the new system did not result in production increase. Reserve resources are needed here, too.

The new policy under the Kim Jong-un rule lacked consistency and often exposed zigzagging directions. Officials responsible for the implementation of the new policy were unable to win over dissenters and failed to secure reserve resources needed to overcome the material imbalance in the transition period.

Eventually, the management reform at factory enterprises and experiments with sub-units in farming areas were virtually abandoned. The sub-unit management failed because of resistance from agricultural bureaucrats, the authorities` unease about relaxation of peasant control and uncertainty about the food security for the privileged class. The sub-unit management system most seriously threatened the stockpiling of food grain for the military and the power elite. It is certain that the military was the biggest opponent to the new agricultural management system.

The New Economic Management System accompanied policies that reduced the privileged role of the military in the economy. Similar problems were certainly exposed in the reform of industrial and financial management, such as non-cooperation from the privileged group, concerns about loosening control of workers and managers, and lack of guarantees for special interests.

Yet, the sub-unit management in farms and increased autonomy of factory enterprises were not entirely meaningless. Interestingly, some in North Korea`s leadership believed that the sub-unit system with incentives to individual farmers was necessary despite many problems attached to the farmers` self-interests. Although it was not successfully implemented, it did help farmers gain more independence from state control.

The unavoidable trend of changes in the North calls for systemic reforms like the sub-unit management just as youths grow up to become adults and then to the middle age. The problem is how to operate the changed system to achieve production increase. To be successful, those in the North Korean leadership who advocate the New Economic Management System should be able to politically suppress those opposing it or win them over economically by assuring them of the distribution of surplus. What has happened to date shows that the new system has failed to make much progress in that direction.

Concerning the projects of building special economic development zones, similar problems have been detected. The Workers` Party Central Committee decided in a plenary meeting in March 2013 to take measures to diversify foreign trade, develop new tourist zones, and build special economic zones suitable for the specific conditions of each province. The Economic Zones Development Act was enacted in May and, as of October 2013, each province is boosting efforts to attract foreign investment and create new economic development zones.

The concept of special economic development zone can be defined as conforming to the “unplanned socialist economy” or the “socialist commodity economy.” But the success of special economic zones needs the three steps that were required to tackle the problems faced by the sub-unit farm management and the autonomous operations of factory enterprises as observed above.

MY NOTES:

This paper is the most comprehensive assessment of the origination and implementation of the DPRK’s “June 28” policies.

The author classifies the June 28 policies as an attempt to transform the DPRK from a system composed of KWP rule + decentralized reform + state ownership of production means to KWP rule + coexistence of market and planned economies + state ownership of production means. This state is called “socialist commodity economy” or “unplanned socialist economy”. The transition involves moving management to enterprises and farms where production is carried out on the basis of contract and state planning.

The plan was carried out by a group under the cabinet led by Ro Tu-chol.

ENTERPRISE SECTOR:
* No more production quotas/Enterprises make own plans and profit distribution
* Raw materials are traded firm to firm via “direct supply centers” (intended to provide nominal state oversight of firm-to-firm transactions)
* Enterprise officials appointed/fired by KWP
*30% profit tax

AGRICULTURE SECTOR
*70/30 split of output (previously state took fixed share regardless of output)
*Smaller collective farm sub ubits
*Smaller private plots and kitchen gardens.

FOOD MANAGEMENT:
*PDS do be abolished but increased control of markets
*Government employees (teachers/doctors) to buy food at “food supply centers” (where all food producers sell supplies).
*military personnel are to buy food at subsidized/fixed price
*”Independent accounting enterprises” (August 3rd?) employees are to be paid in cash and buy food. Enterprises still controlled by state to get rations.

Stephan Haggard wrote about the paper here and here.

All posts on the June 28 policy can be found here.

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