During the late 1990s, North Korea suffered a terrible economic collapse which resulted in famine and massive social dislocation. During this time, most ministries and state-owned companies were cash-strapped and unable to maintain their operations. Out of desperation they turned to private investment for much needed revenues by outsourcing many basic services. (Individuals who were capable of taking up such opportunities were probably small in number at the time, but apparently now compose a healthy sub-section of the population.)
Outsourcing has benefited both the government and private entrepreneurs. Outsourcing allows state-owned companies to receive capital financing from private individuals as well as a share of joint-venture revenues (tax revenues). Private entrepreneurs need a legal business environment where they know they will not be subject to ex-post expropriation of profits. Leasing the name of a government body gives them some of this legal cover. This system is no doubt tolerated because it allows the government create space for entrepreneurship (and tax revenue) within the existing state structure while still maintaining de jure control of the means of production.
According to the story in the Daily NK, the regulations for establishing a legitimate passenger bus company under this system (or “coach” company for readers in Her Majesty’s Commonwealth) are fairly strict. Once an individual acquires a bus (appx US$6,000-10,000), he has to register it with the government body for whom he is working. Revenues are then split 70/30 (the government taking 30%) for three years, after which the individual is required to “donate” the privately acquired bus to the state-owned enterprise. This policy literally gives North Korean entrepreneurs just three years to recoup their investments!
The response of the North Korean business community was predictable: investors sell the buses before the three years are up or they forge registration papers. This is not hard to do in the DPRK. In fact if you have just one other associate who owns a bus in similar condition, all you need to do is trade with him every three years and re-register the new vehicle.
Word of this game has finally reached the top and they have responded by increasing their share to 70% of passenger bus revenues–leaving just 30% for the purchaser of the vehicle. It is unclear from the story if investors are still required to “donate” their busses after three years, but realizing that the confiscation of buses was not enforceable, the North Korean government probably just opted for a larger share of the revenue over time.
The good news is that it is not likely that many people pay 70% of revenues either. After-all, someone has to collect these taxes and he has needs too. Sounds like some kind of arrangement could be reached…
You can read the full story here:
North Korea Regulates Operation of “Service Car”
Daily NK
2/18/2008
