Economic reform comes slowly

from a great story in the Economist:

benefits of reform:

  • The electricity supply has slightly improved in Pyongyang, as well as on the east coast in Hamhung and Chongjin. Apartment-block lights are now on for much longer.
  • Second-hand bicycles, from Japan and China, are numerous, particularly in cities on the poor, industrial east coast.
  • Farmers are allowed their own small gardens, and farmers’ markets are now referred to simply as “markets”, because, as well as food, they sell consumer goods. Significantly, these markets have been given official approval. In June, the government appealed for help from other countries in running them. As Marcus Noland of the Institute for International Economics in Washington, DC, explains, one immediate effect of the reforms is that there are now products available for hard currency, such as video players and movies like “The Lion King” dubbed in Korean, which were previously unobtainable. The government is also encouraging foreign investment in industries such as mining, energy, agriculture and information technology
  • The leadership recently gave its approval for a South Korean company that assembles cars in North Korea to launch a marketing campaign.
  • Mobile-phone services have been started in the country’s main cities and along its motorways.
  • North Korea’s tourism authority claims that 2,000 Motorola and Nokia mobile handphones were sold in Pyongyang between November 2002 and August 2003. This in a country where barely a million land lines exist, out of a total population of 23m.
  • The Hermit Kingdom recently announced plans to develop broadband internet capabilities to improve the business environment. The plan is to link the domestic intranet, called Kwangmyong, to the internet. The North’s national domain designation, “.kp”, is still not in use, but the government has reportedly been testing e-mail addresses incorporating it. There is even an internet café in Pyongyang, though at $10 per hour it is affordable only to the few tourists, diplomats and journalists who visit the city. Currently, only Mr Kim and a few privileged others can use the optical communications lines supplied to North Korea by China’s China Telecom. Contrast this to the state of affairs in the south, which has the world’s greatest penetration of high-speed broadband connections and where more than 65% of households now have internet access.

These observations say little about how the economy as a whole is doing. The sad truth seems to be that the leadership in the North undertook its partial reforms out of necessity, not because it had understood or embraced the market. Rather, for the past 15 months, according to a Korea expert, Kongdan Oh, at the Institute for Defence Analyses in Virginia, the country has been “creatively muddling through”. While the average North Korean has more economic freedom, the economy is near collapse.

Nicholas Eberstadt of the American Enterprise Institute, in Washington, DC, estimates that, if anything, economic decline has accelerated, not reversed. Last year’s price and wage increases saw prices rise 10 to 20-fold and wages rise by 20 times or more, the idea being to bring them more into line with market rates. But the increases have not been matched by measures to boost output, so inflation has spiralled out of control. The price of staple foods, for instance, has risen by as much as 400%, and the country continues to rely on foreign handouts to feed its people.

In a recent paper, Mr Noland argues that those with access to foreign exchange, such as senior party officials, do not feel the effects of inflation as severely as salaried workers who have no access to foreign exchange. So for urban residents with access to hard currency, in some respects things are much better. But for the bulk of the population, things are quite grim. As much as 80% of an average family’s income now goes towards food.

Just how committed is the regime of Kim Jong Il to its programme of market reform? Probably not very. It shows no sign of embracing reforms that could potentially undermine the state’s control. It continues to emphasise “military-first” policies, reserving the best of everything for the army it depends on. And even if greater economic reform were undertaken, it is far from certain that it would be successful any time soon.

The economy continues to suffer from a lack of energy, transport infrastructure and basic foodstuffs. Many factories—all of which under the reforms now have to pay their own way—have been shut down, leaving people without jobs and therefore no money to buy food. And since the North admitted last year to its illicit nuclear programme, aid flows have diminished and oil deliveries by the Korean Peninsula Energy Development Organisation have been suspended.

Foreign investors still stay away and the few companies that have been bold enough to invest in the North, such as Hyundai Asan, have lost millions of dollars. So, though much has changed in North Korea over the past 15 months, the probability is that more will stay the same


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