Archive for the ‘Price liberalization’ Category

Trading Ideals for Sustenance

Monday, July 4th, 2005

Los Angeles Times
Barbara Demick
7/4/2005

For most of her life, Kim Hui Suk had spouted the sayings of North Korea’s founder Kim Il Sung and never for a moment harbored a doubt: Capitalists were the enemy. Individualism was evil.

But then disaster rained down on her hometown, Chongjin, on North Korea’s remote east coast. Factories ran out of fuel. Food rations stopped. Watching her family slowly succumb to the famine — her mother-in-law, husband and son eventually would die of starvation — Kim realized she had to change.

Once a stickler for following the rules, she bribed a bureaucrat so she could sell her apartment. Then, with no business skills other than the ability to calculate on an abacus, she used the proceeds of the sale to set herself up in a black market business, hawking biscuits and moonshine she brewed from corn.

Kim could have been sent away for life for such crimes. But obeying the rules would have meant a death sentence.

“The simple and kind-hearted people who did what they were told — they were the first to die of starvation,” said Kim, a soft-spoken grandmother who now lives in South Korea and has adopted a new name to protect family members still in the North.

The famine that killed 2 million North Koreans in the mid-1990s and the death of the nation’s founder, Kim Il Sung, in 1994 sparked vast changes across the secretive communist country.

Markets are springing up in the shadows of abandoned factories, foreign influences are breaching the borders, inflation is soaring and corruption is rampant. A small nouveau riche class has emerged, even as a far larger group has been forced to trade away everything for food.

This is the picture of life in North Korea as painted by more than 30 people from Chongjin, the nation’s thirdlargest city. Some are defectors living in South Korea. Others were interviewed in China, which they had entered illegally to work or beg. Accounts of aid workers and videos taken illegally in Chongjin by disgruntled residents were also used to prepare this report.

Although the North Korean regime has a reputation as the ultimate Big Brother, people from Chongjin say the public pays less and less heed to what the government says. There is little that might be called political dissent, but residents describe a pervasive sense of disillusionment that remains largely unspoken.

“People are not stupid. Everybody thinks our own government is to blame for our terrible situation,” said a 39-year-old coal miner from Chongjin who was interviewed late last year during a visit to China. “We all know we think that, and we all know everybody else thinks that. We don’t need to talk about it.”

Kim Sun Bok, a 32-year-old former factory worker who came to South Korea last summer, said the country was “changing incredibly.”

“It is not the same old North Korea anymore except in name.”

Just a decade ago, when people in Chongjin needed new trousers, they had to go to government-owned stores that sold items mostly in drab browns or a dull shade of indigo. Food and other necessities were rationed. Sometimes the government permitted the sale of home-grown vegetables, but even a hairbrush was supposed to be purchased from a state-run shop.

Today, people can shop at markets all over Chongjin, the result of a burst of entrepreneurship grudgingly allowed by the authorities. Almost anything can be purchased — ice cream bars from China, pirated DVDs, cars, Bibles, computers, real estate and sex — for those who can afford the high prices.

The retail mecca is Sunam market, a wood-frame structure with a corrugated tin roof that is squeezed between two derelict factories.

The aisles brim with fresh cucumbers, tomatoes, peaches, scallions, watermelons and cabbage, as shown by rare video footage taken last year by the Osaka, Japan-based human rights group Rescue the North Korean People. Everything else comes from China: belts, shoes, umbrellas, notebooks, plates, aluminum pots, knives, shovels, toy cars, detergents, shampoos, lotions, hand creams and makeup.

Each of Chongjin’s seven administrative districts has a state-sanctioned market. Sunam, the city’s largest, is expanding, and some say it has a wider variety of goods than the main market in Pyongyang. Many vendors wear their licenses pinned to their right breasts while the obligatory Kim Il Sung buttons remain over the heart.

Although markets have been expanding for more than a decade, it was only in 2002 and ’03 that the government enacted economic reforms that lifted some of the prohibitions against them. Most of the vendors are older women such as Kim Hui Suk, a tiny 60-year-old with short, permed hair and immaculate clothing.

She was working in the day-care center of a textile factory in the early 1990s when production ground to a halt. Men were ordered to stay in their jobs, but Workers’ Party cadres at the factory started whispering that the married women, or ajumas, ought to moonlight to provide for their families.

“It was clear that the ajumas had to go out and earn money or the family would starve,” Kim said.

She first tried to raise pigs, locking them in a shed outside her downtown apartment building and feeding them slop left over from making tofu. But the electricity and water were too unreliable to keep the business going.

In 1995, Kim sold her apartment in the choice Shinam district and bought a cheaper one, hoping to use the proceeds to import rice from the countryside. But that too failed when she injured her back and couldn’t work.

The family’s situation became dire. Her husband’s employer, a provincial radio station, stopped paying salaries, and food distribution ended. In 1996, her mother-in-law died of starvation, and her husband the following year.

“First he got really, really thin and then bloated. His last words to me were, ‘Let’s get a bottle of wine, go to a restaurant and enjoy ourselves,’ ” Kim recalled. “I felt bad that I couldn’t fulfill his last wish.”

In 1998, Kim’s 26-year-old son, who had been a wrestler and gymnast, grew weak from hunger and contracted pneumonia. A shot of penicillin from the market would have cost 40 won, the same price as enough corn powder to feed herself and her three daughters for a week. She opted for the corn and watched her son succumb to the infection.

But Kim did not give up. She swapped apartments again and used the money to start another business, this time baking biscuits and neungju, a potent corn moonshine. If buyers didn’t have cash, she would accept chile powder or anything else she could use.

“We made just enough to put food on the table,” said Kim.

Much of Chongjin’s commerce is still not officially sanctioned, so it has an impromptu quality. Money changes hands over wooden carts that can be rolled away in a hurry. Those who can’t afford carts sell on tarpaulins laid out in the dirt.

Fashion boutiques are slapped together with poles and clotheslines, enlivening the monochromatic landscape with garish pinks and paisleys. Some clothes have the labels ripped out and vendors whisper that these items came from araet dongne or the “village below,” a euphemism for South Korea, whose products are illegal in the North.

Shoppers can buy 88-pound sacks of rice emblazoned with U.S. flags, and biscuits and corn noodles produced by three factories in Chongjin run by the U.N. World Food Program — all intended to be humanitarian handouts.

Some people cut hair or repair bicycles, though furtively because these jobs are supposed to be controlled by the government’s Convenience Bureau.

“They will bring a chair and mirror to the market to cut hair,” Kim said. “The police can come at any moment, arrest them and confiscate their scissors.”

Another new business is a computer salon. It looks like an Internet cafe, but because there’s no access to the Web in North Korea, it is used mostly by teenagers to play video games.

More products are available, but inflation puts them out of reach for most people. The price of rice has increased nearly eightfold since the economic reforms of 2002 to 525 won per pound; an average worker earns 2,500 won a month — about $1 at the unofficial exchange rate.

World Food Program officials in North Korea say the vast majority of the population is less well off since the economic changes, especially factory workers, civil servants, retirees and anybody else on a fixed income. But there are those who have gotten rich. Poor Chongjin residents disparage them as donbulrae, or money insects.

“There are people who started trading early and figured out the ropes,” said a 64-year-old retired math teacher who sells rabbits at the market. “But those of us who were loyal and believed in the state, we are the ones who are suffering.”

If Chongjin’s economic center is Sunam market, its political heart is Pohang Square, a vast plaza dominated by a 25-foot bronze statue of Kim Il Sung.

The grass here is neatly mowed, the shrubbery pruned and the pavement in good repair. Even when the rest of the city is without electricity, the statue is bathed in light. Across the street, a tidy pink building houses a permanent exhibit of the national flower, a hybrid begonia called Kimjongilia, named for current leader Kim Jong Il.

Since the practice of religion is barred, Pohang Square stands in as a spiritual center. Newlyweds in their best clothes pose for pictures, bowing to the statue so that their union is symbolically blessed.

When Kim Il Sung died on July 8, 1994, half a million people came to Pohang Square to pay their respects in the pouring rain and stifling heat. But among the adoring multitudes, there were malcontents.

One was Ok Hui, the eldest daughter of entrepreneur Kim Hui Suk. Though she dutifully took her place in the throng, any sadness she felt came from a foreboding that Kim Jong Il would be worse than his father.

“I went day and night along with everybody else. You had to…. But there were no tears coming from my eyes,” recalled Ok Hui, now 39, who did not want her family name published.

Ok Hui worked for a construction company’s propaganda unit, a job that entailed riding around in a truck with a megaphone, exhorting workers to do their best for the fatherland. But she didn’t believe what she preached.

Her father had taught her to doubt the regime. As a reporter and member of the Workers’ Party, he knew more about the outside world than many people and realized how far North Korea lagged behind South Korea and China.

“He and his friends would stay up at night when my mother was out, talking about what a thief Kim Jong Il was,” Ok Hui said.

Her mother, though, remained a firm believer. “I lived only for the marshal. I never had a thought otherwise,” said Kim Hui Suk. “Even when my husband and son died, I thought it was my fault.”

Ok Hui and her mother frequently clashed. “Why did you give birth to me in this horrible country?” Ok Hui remembers taunting her mother.

“Shut up! You’re a traitor to your country!” Kim retorted.

“Whom do you love more? Kim Jong Il or me?” her daughter shot back.

The regime was probably less beloved in Chongjin than elsewhere in North Korea. Food had run out in its province, North Hamgyong, earlier than in other areas, and starvation rates were among the highest in the nation.

Chongjin’s people are reputed to be the most independent-minded in North Korea. One famous report of unrest centers on the city. In 1995, senior officers from the 6th army corps in Chongjin were executed for disloyalty and the entire unit, estimated at 40,000 men, was disbanded. It is still unclear whether the incident was an attempted uprising or a corruption case.

Chongjin is known for its vicious gang wars, and it was sometimes difficult to distinguish political unrest from ordinary crime. There were increasing incidents of theft and insubordination. At factories, desperate workers dismantled machinery or stripped away copper wiring to sell for food.

Public executions by firing squad were held outside Sunam market and on the lawn of the youth park, once a popular lover’s lane.

In a village called Ihyon-ri on the outskirts of Chongjin, a gang suspected of anti-government activities killed a national security agent who had tried to infiltrate the group, former kindergarten teacher Seo Kyong Hui said.

“This guy was from my village. He had been sent to inform on a group that was engaged in suspicious activities,” she said. “They caught him and stoned him to death.”

Work crews went out early in the morning to wash away any anti-regime graffiti painted overnight, according to human rights groups, but most people were too scared to express their discontent. Badmouthing the leadership is still considered blasphemy.

To discourage anti-regime activity, North Korea punishes “political crimes” by banishing entire families to remote areas or labor camps.

“If you have one life to live, you would gladly give it to overthrow this government,” said Seo, the teacher. “But you are not the only one getting punished. Your family will go through hell.”

Even as Kim Jong Il’s regime weakens, many of its stalwarts are growing richer. Many of Chongjin’s well-to-do are members of the Workers’ Party or are connected to the military or security services. In the new economy, they use their ties to power to trade with China, obtain market licenses, extract bribes and sell bureaucratic favors.

“Those who have power in North Korea always figure out ways to make money,” said Joo Sung Ha, 31, who grew up in Chongjin and now works as a journalist in Seoul.

Joo was the pampered only son of a prominent official, and his family lived in Shinam, in the city’s northern hills overlooking the ocean. By the standards of South Korea or China, the single-family homes with lines of fish and squid drying from the roofs are nothing special. But for North Koreans, these are mansions.

The Joo family had a 2,000-square-foot cement-block house and a walled garden about twice that large. The garden proved crucial in protecting the family against the famine, though they had to contend with hungry soldiers who would scale the walls and steal potatoes and cabbages.

North Korean families like to measure their status by the number of wardrobes they own, and Joo’s family had five — plus a television, a refrigerator, a tape recorder, a sewing machine, an electric fan and a camera. They didn’t have a phone or a car — at that time those were unthinkable even for a well-off family — but they did have a bicycle.

“The appliances were of no use after the electricity ran out,” Joo said. “The bicycle was the most important thing, because the buses and trams stopped running.”

Joo attended the best elementary school in Chongjin, the city’s foreign language institute, and eventually the country’s top school, Kim Il Sung University in Pyongyang. He never met a native English speaker in the North, or any foreigner for that matter, but he trained his ear with videotapes of the BBC and banned Hollywood films.

“I sometimes watched ‘Gone With the Wind’ twice a day. Anybody else would have been arrested for watching Hollywood movies,” he recalled.

Joo’s glimpses of Western culture eroded his loyalty to the system. “I saw myself 20 years down the road in the prime of my career and North Korea would be collapsing,” he said.

While many of his classmates went to work for the regime’s propaganda news service after graduating, Joo arranged to return to Chongjin, where he taught high school until he escaped in 2001.

“The people from our neighborhood couldn’t understand,” said Joo, who stays in contact with his family. “They thought I had everything.”

Kim Hye Young, an actress, was also a child of privilege. Her father, Kim Du Seon, was an official of a trading company that sold mushrooms and fish in China. He learned how to navigate the bureaucracy, using his connections with the army and security services.

“If one of [the officials] had a wedding in the family, they would come to me for a couple of cases of wine,” the older Kim said.

As trade with China became more important, the family prospered. They took drives in a company car and ate at Chongjin’s nicest restaurant.

Growing up, Kim showed a flair for theater, and through her acting became a member of the elite in her own right. Her best-known role was in a play called “The Strong and the Righteous,” in which she portrayed a spy who sacrifices her life for North Korea.

When the production won first place in a Pyongyang drama festival in 1996, she got to meet Kim Jong Il. Still breathless with the memory, she said the leader shook her hand and gave her a fountain pen.

“I knew that I, as an actress, had an important role to promote the ideology of my country,” Kim said.

Kim and her sisters were largely oblivious to the famine, and their mother said she took pains to shelter them.

“My daughters don’t know to this day how many children in our neighborhood starved to death,” said her mother, Choe Geum Lan. She also didn’t tell them that their father, as a result of his business trips to China, had become increasingly pessimistic about North Korea’s future.

In 1998, when Kim was home from Pyongyang on vacation, her parents told her the family was going to visit an aunt in Musan, a city near the Chinese border. It was not until they had crossed to the other side that Kim and her teenage sisters, were told they had defected.

Kim, now 29 and advertising toothpaste on South Korean television, is one of the few defectors who says she didn’t want to leave.

“I was content with my life,” she said.

Today, North Korea’s elites are even better off, buying telephones for their homes and even cars.

“For $4,000 or $5,000, anybody can buy a car now. It used to be that you weren’t allowed to register your own car. We couldn’t dream of it,” said Kim Yong Il, a defector from Chongjin who lives in Seoul.

Recently, he arranged to have a computer smuggled from China to his relatives in Chongjin. North Korea’s state-run companies don’t have computers, so they’re eager to hire people who do. “If you have a computer, you can get a job,” he said.

Visitors have been shocked to glimpse the new conspicuous consumption in Chongjin.

Jeung Young Tai, a South Korean academic who was in Chongjin delivering South Korean government aid, noticed a paunchy man standing in front of the Chonmasan Hotel next to a new Lexus.

And at a hot spring in Kyongsong, on the city’s outskirts, he saw a woman carrying a lap dog — a striking sight in a country where there is so little food that the only pets usually are goldfish.

“You get the sense that there is a tremendous gap between rich and poor and that the gap is growing,” Jeung said.

The flip side, of course, is that the poor are getting poorer.

In Chongjin, those at the very bottom of the heap can be found at the train station.

The cavernous building boasts a large portrait of Kim Il Sung above the entrance and a granite-faced clock that rarely tells the right time. In front is a vast plaza crammed with people waiting for trains — sometimes for days, because the trains have no fixed schedules — and people waiting for nothing at all.

These are the homeless, many of them children. They’re called kotchebi, or swallows, because they wander the streets and sometimes between towns in search of food. Many gravitate to Chongjin station, because it is a major hub and the travelers have more to give.

A video shot last year by a military official and sold to Japan’s NTV television captured barefoot children near the station in torn, filthy clothing fighting over a nearly empty jar of kimchi. One boy scooted along the pavement on his buttocks; the narrator said his toes had been eaten away by frostbite.

Kim Hyok knows how easy it is for a child to end up at the station; he spent the better part of two years living there.

“If you can’t find somebody or they left their home, chances are you can find them at the station,” said Kim, now 23 and resettled in South Korea.

Kim’s mother died when he was a toddler, and he was raised by his father, a party member and an employee of a military unit that sold fish in China. During his early childhood, Kim, his father and elder brother lived in relative comfort in a high-rise apartment in the Sunam district.

When the government stopped handing out rations in 1993, Kim’s father used his connections to place his sons in an orphanage 60 miles away.

Kim, who was about 12 at the time, wasn’t sorry to be sent away. It was considered a privilege because the orphanages had food.

In 1997, just before his 16th birthday, Kim “graduated” from the orphanage. He caught a train back to Chongjin, but when he got to his neighborhood, things looked unfamiliar. The electricity was off. Many apartment buildings had no glass in the windows and appeared vacant.

Climbing the eight flights in pitch dark to his family’s unit, he heard a baby crying and wondered whose it might be. Confused and scared, he knocked on the door.

A young couple opened the door and told him his father had moved long ago but left a message: Look for him at the train station.

The phenomenon of vagrancy is testament to how much North Korea has changed. Before the famine, the government controlled people’s movements so strictly that they could not dream of visiting a relative in a nearby town without a travel permit, let alone selling their homes. Not showing up for work could bring a visit from police.

But as people embarked on increasingly desperate hunts for food, families broke apart. With few telephones and a barely functional postal service, parents and children became separated.

“People just started wandering around because they were hungry,” Kim said. “They would sell their apartments for a few bags of rice.”

Kim never found his father. He also never found his brother, who had left the orphanage a year earlier.

With no place to go, Kim ended up at the train station. By night, he slept squeezed into a narrow space designed for a sliding iron gate. By day, he loitered near the food vendors on the plaza. He often worked with a gang of other kids — a few would topple a vendor’s cart and the others would scoop up whatever spilled.

“If you’re not fast, you can’t eat,” said Kim, who even today in South Korea bears the signs of chronic malnutrition, with a head that looks oversized on a shockingly short frame.

Kim began hopping the slow-moving trains that pass through Chongjin on their way to the Chinese border. Once on board, Kim would scramble up to the top of a car, flatten himself to avoid the electric lines above and, using his pack as a pillow, ride for hours.

At the border, he would wade across the river to hawk the items in his pack: household goods on consignment from Chongjin residents, who were selling off their possessions.

In 1998, Kim was arrested by Chinese authorities, who do not recognize North Koreans as refugees. He was sent back to North Korea and spent two years in a prison camp before escaping again in 2000 to China, where he was eventually taken in by missionaries and brought to South Korea.

For every homeless person who survived, many more likely died. Kim Hui Suk recalled a particularly ghoulish scene at the train station.

“Once I saw them loading three bodies into a cart,” Kim said. “One guy, a man in his 40s, was still conscious. His eyes were sort of blinking, but they still were taking him away.”

Although the ranks of the homeless have thinned since the height of the famine, North Korean residents say their numbers are still considerable.

“If somebody disappears, you don’t know whether he dropped dead on the road or went to China,” the coal miner said.

About 100,000 North Koreans have escaped to China in the last 10 years. Many have ended up returning to North Korea, either because they were deported or because they missed their families. They often bring back money, goods to trade and strange new ideas.

Smugglers carry chests that can hold up to 1,000 pirated DVDs. South Korean soap operas, movies about the Korean War and Hollywood action films are among the most popular. Even pornography is making its way in.

This is a radical change for a country so prudish that until recently women were not permitted to ride bicycles because it was thought too provocative. Seo Kyong Hui, the kindergarten teacher, said that when she left North Korea in 1998, “I was 26 years old, and I still didn’t know how a baby was conceived.”

Even today, women are prohibited from wearing short skirts or sleeveless shirts, and both sexes are forbidden to wear blue jeans. Infractions bring rebukes from the public standards police.

But it is a losing battle to maintain what used to be a hermetic seal around the country. Just a few years ago, ordinary North Koreans could make telephone calls only from post offices. Dialing abroad was virtually impossible. Now some people carry Chinese cellphones and pay for rides to the border to pick up a signal and call overseas.

Smugglers also bring in cheap Chinese radios. Unlike North Korean radios, which are preset to government channels, the Chinese models can be tuned to anything, even South Korean programs or the Korean-language broadcasts of Radio Free Asia.

In the past, being caught with such contraband would land a person in political prison. Nowadays, security personnel will more likely confiscate the illicit item for personal use.

When a policeman caught Ok Hui, the entrepreneur’s daughter, with a Chinese radio in 2001, the first question he asked was, “So how do you work this thing?”

She wrote down the frequencies for South Korean radio stations.

“Don’t you have earphones so you can listen without anybody hearing you?” the officer then demanded.

North Korea instructs its citizens that the country is a socialist paradise, but the government knows outside influences can puncture its carefully crafted illusions.

“Bourgeois anti-communist ideology is paralyzing the people’s sound mind-set,” warns a Workers’ Party document dated April 2005. “If we allow ourselves to be affected by these novel ideas, our absolute idolization for the marshal [Kim Il Sung] will disappear.”

Among those who make it to China, many describe a moment of epiphany when they find out just how bad off North Koreans are.

Kim Ji Eun, a doctor from Chongjin, remembers wading across the partially frozen Tumen River in March 1999, staggering to a Chinese farmhouse and seeing a dish of white rice and meat set out in a courtyard.

“I couldn’t figure it out at first. I thought maybe it was for refrigeration,” recalled Kim, who now lives in South Korea. “Then I realized that dogs in China live better than even party members in North Korea.”

Many Chongjin residents who are caught trying to flee the country end up back in the city, behind the barbed wire of Nongpo Detention Center.

It sits near the railroad tracks in a swampy waterfront area. Prisoners are assigned back-breaking jobs in the nearby rice paddies or brick factory, where the workday begins at 5 a.m.

Ok Hui was one of those who served time in Nongpo. A rebel by nature, she had become fed up with North Korea and a difficult marriage.

In September 2001, during one of several failed attempts to escape, she was arrested in Musan and brought back to Chongjin by train. Guards tied the female prisoners to one another by tightly winding shoelaces around their thumbs.

In Nongpo, the inmates bunked in rows of 10, squeezed so tightly together that they had to sleep on their sides. Newcomers sometimes had to bed down in the corridor near overflowing toilets. Meals consisted of a thin, salty soup, sometimes supplemented by a few kernels of raw corn or a chunk of uncooked potato.

“The walls were very high and surrounded by wire,” Ok Hui said. “One woman tried to climb the wall. They beat her almost to death. You can’t imagine. They made us stand and watch.”

One day, when she was assigned to work in the fields, she spotted an old woman. She took off her underwear and offered it to the woman in exchange for sending a message to her mother. Underwear is scarce in North Korea, so the woman accepted and agreed to send a telegram to Ok Hui’s mother.

With her market earnings, Kim Hui Suk bought 10 packs of cigarettes for a security official to arrange her daughter’s release.

Some days later, the prison administrator came to talk to Ok Hui and other female prisoners who were picking corn. They were all due to be freed shortly, and the administrator urged them to resist the temptations of capitalism and imperialism, and to devote themselves to North Korea.

Then, he asked for a show of hands: Who would promise not to run away again to China?

Not a single woman raised her arm.

“We were all just thinking that our whole lives we had been told lies,” Ok Hui recalled. “Our whole lives, in fact, were lies. We just felt this immense rage toward the system.”

The prison administrator looked at the women squatting sullenly in silence in the cornfield.

“Well,” he said, “if you go again to China, next time don’t get caught.”

Forty days after her release, Ok Hui escaped again to China and made her way to South Korea. She used $8,000 in resettlement money from South Korea’s government to pay a broker to smuggle her mother out of North Korea. Today Ok Hui works in a funeral home and her mother as a housekeeper.

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Overview of DPRK economic reform efforts

Tuesday, April 12th, 2005

The BBC offers a summary of economic conditions in the DPRK:

The focus of the international community’s alarm over North Korea is the isolated nation’s nuclear arsenal, and its refusal to talk about it.

An aspect that is sometimes overlooked is the dire state of its economy, and yet this could be at the heart of the nuclear crisis.

The regime, with few allies in the world, cannot appeal to the sort of humanitarian emotions that African or South Asian nations have in the past.

To ensure the flow of food and oil, it must have a bargaining chip, and its nuclear arsenal is that chip.

Therefore Pyongyang’s diplomatic bluster is inextricably linked to its need to keep what remains of its economy propped up by donations.

North Korea has recently attempted limited reforms to its economy, but these have not been comprehensive or well-enough planned to work.

Pushed into reform

North Korea became an independent state in 1953, and has operated a rigid centrally planned, or “command” economy based on that developed by Stalin in the USSR.

Industry and agriculture are planned on a five-year basis, all farms are collectivised, volume is praised over value and most foods and goods are rationed.

This model initially allowed for rapid industrialisation and rebuilding, but it failed to deliver sustainable growth or raise living standards.

The economy began to collapse, and by the mid-1990s the country was in a state of famine. The industrial base and the agricultural sector have been in decline ever since. Beijing, North Korea’s only real ally, decided to act in October 2001 with an economics lesson for North Korean leader Kim Jong-il.

He was shown round a GM plant and a hi-tech factory in Shanghai, and received a lecture about the benefits of Chinese-style reform.

The Chinese were effectively telling Mr Kim that it was time for change – and that they were fed up with the growing number of refugees fleeing over the Chinese border, and increasing demands for aid.

Mr Kim realised he needed to keep China close, and in June 2002 announced a series of economic reforms.

Pyongyang partially ended rationing and reformed the wages and pricing system.

Retail prices shot up – rice by 55,000%, corn 5,000%, electricity 143% and public transport fares 2,000% – but average wages increased by just 1,818% – from 110 won to 2,000 won (US$22) per month.

It also allowed private farmers’ markets to expand – to provide more goods for the consumers this monetary liberalisation had created.

Another major plank of the reforms was the new investment zone in Sinuiju – and another one in Kaesong, agreed as part of Kim Dae-jung’s Sunshine Policy.

These investment zones used foreign investment to create new economic ventures.

But neither the wage and pricing reform, nor the investment zones, have worked.

Scarce resources

The government had hoped that inflation created by the reforms, if kept under control, would “kick-start” the economy.

But this theory assumed there was a mass of underutilised resources waiting to be kick-started. Twenty-five years of decline meant that these resources were now scarce.

More food found its way into the farmers’ markets, but at prices ordinary people could not afford.

This effective legitimisation of private farming and smuggling across the border from China only succeeded in increasing the availability of goods to the elite – those whose wages were protected or had access to foreign currency.

As for the economic zones, Sinuiju’s position, opposite China’s flourishing economic zone in Dandong, annoyed Beijing.

It consequently arrested the Chinese businessman hired to run Sinuiju, imprisoning him for 18 years for tax evasion and effectively ending the project.

Kaesong survives but all the ventures are foreign-owned, with little benefit, therefore, for North Korea.

By the end of 2002, economic growth was estimated at just 1.2% at best, with the average citizen’s purchasing power severely eroded.

For most ordinary North Koreans, the end result of the reforms was further impoverishment and the eroding of any savings they may have been able to build up.

So, in light of the reforms’ failure, North Korea’s alleged announcement in October 2002 that its country was pursuing an enriched uranium programme could be interpreted as a return to its old bargaining tactics.

The international community responded to the announcement by setting up six-party talks in August 2003.

But the diplomacy is failing because North Korea, with no allies but the increasingly exasperated Chinese, and little prospect of economic revitalisation, needs to ensure a continued drip feed of aid.

That means a hard bargaining process, and Mr Kim has one bargaining chip – his nuclear bombs.

Already twice, as far as we know, Beijing has managed by persuasion, and perhaps a little economic pressure, to get Pyongyang back to the table after talks have stalled.

Now Beijing is trying again. Perhaps what Pyongyang wants most is a serious package of economic aid from China.

China may provide it to get the talking started again.

But the price Beijing will need to demand is that Pyongyang restarts economic reform in earnest, and moves away from the continual brink of collapse that forces it to make desperate diplomatic gambles such as the current crisis.

As for the economy today, it has to all intents and purposes collapsed.

The reforms were limited, and benefited just the elite of the country rather than ordinary people.

The basic structure remains in place and continues to erode the economy.

However, as long as the regime can keep the country isolated, it can survive on this drip-feed indefinitely.

The endgame is simple – regime survival. It is a long-term strategy using diplomatic belligerence and military threat to secure enough aid to maintain power and isolation.

The regime may survive, and may under pressure begin another round of tentative reform, but it seems unlikely that life will improve for ordinary North Koreans any time soon.

Read the full story here:
Economy root to N Korea crisis
BBC
Paul French
2005-4-12

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Welcome to capitalism, North Korean comrades

Saturday, December 4th, 2004

Asia Times
Andrei Lankov
12/4/2004

A creeping revolution, both social and economic, is under way in North Korea and it seems there’s no turning back. For decades, the country served as the closest possible approximation of an ideal Stalinist state. But the changes in its economy that have taken place after 1990 have transformed the country completely and, perhaps, irreversibly.

For decades, Pyongyang propaganda presented North Korea as an embodiment of economic self-sufficiency, completely independent from any other country. This image sold well, especially in the more credulous part of the Third World and among the ever-credulous leftist academics. The secret of its supposed self-sufficiency was simple: the country received large amounts of direct and indirect aid from the Soviet Union and China, but never admitted this in public. Though frequently annoyed by such “ingratitude”, neither Moscow nor Beijing made much noise since both communist giants wanted to maintain, at least superficially, friendly relations with their small, capricious ally.

But collapse of the Soviet Union made clear that claims of self-sufficiency were unfounded. From 1991, the North Korean economy went into free fall. Throughout 1991-99, the gross national product (GNP) of the Democratic People’s Republic of Korea (DPRK) nearly halved. The situation became unbearable in 1996, when the country was struck by a famine that took, by the best available estimates, about 600,000 lives. The famine could have been prevented by a Chinese-style agricultural reform, but this option was politically impossible: such a reform would undermine the government’s ability to control the populace.

The control on daily lives was lost anyway. What we have seen in North Korea over the past 10 years can be best described as collapse of what used to be rigid Stalinism from below. In the Soviet Union of the late 1950s and in China of the late 1970s, Stalinism-Maoism was dismantled from above, through a chain of deliberate reforms planned and implemented by the government. In North Korea the same thing happened, but the system disintegrated from below, despite weak and ineffectual attempts to keep it intact.

In the 1960s, North Korea was unique in being the only nation in the world where markets were outlawed. The retail trade in a strict sense almost ceased to exist since virtually everything, from socks to apples, was distributed through an elaborate public distribution system with money payments being rather symbolic. The rations depended on a person’s position in the intricate social hierarchy, which eventually became semi-hereditary. In Kim Il-sung’s North Korea, there was almost nothing that could be sold on market since production outside the state economy was almost non-existent.

Unlike governments of other communist countries, until the late 1980s the North Korean government did not even allow its farmers to cultivate kitchen gardens – the individual plot was limited to merely 20-30 square meters, hardly enough to grow enough chili pepper. This was done on purpose. In many other communist countries, farmers had bigger plots and made their living from them, ignoring their work obligations to the state-run cooperative farms. Without their own plots, farmers would work more for the state – or so believed the North Korean government. In the utopia constructed by Kim Il-sung, every single man or woman was supposed to work for the state, and was rewarded for his and her efforts with officially approved rations and salaries.

In 1969, Kim himself admitted that the anti-market policy had been a failure. Thus private markets were gradually legalized, but remained small and strictly controlled. However, as late as late 1980s, markets were still considered inappropriate for a “socialist paradise”. They were something to be ashamed of, so they were pushed to the margins of the city. Until the early 1990s, most markets were in places more or less hidden from view, inside residential blocks and behind high concrete walls. In Pyongyang, the main city market was set up under a huge viaduct at the easternmost part of the North Korean capital, as far from the city center as possible.

However, the economic disaster of 1991-95, and especially the subsequent famine, changed the situation. Markets began to spread across the country with amazing speed. From 1995-97, nearly all plants and factories ceased to operate. The rations were not issued anymore: in most areas people still received ration coupons but these could not be exchanged for food or other rationed goods. Only in Pyongyang and some other politically important areas did food continue to be distributed. But even there, the norms were dramatically watered down. In such a situation, the ability and willingness to engage in some private business became the major guarantee of physical survival.

The government also relaxed the restrictions on domestic travel. Since around 1960, every North Korean who ventured outside his native county was required to have a special “travel permit” (an exception was made for one-day travel to neighboring counties). However, in the mid-1990s, the authorities began to turn a blind eye to unauthorized travel. It is not clear whether it was a deliberate relaxation or just inability to enforce regulations when the state bureaucracy was demoralized. After all, a bribe of some US$5 would buy such a permit from a police officer.

The tidal wave of small trade flooded the country, which once came very close to creating a non-money-based economy. People left their native places in huge numbers. Many sought places where food was more available while others enthusiastically took up the barter trade, including smuggling of goods to and from China. Women were especially prominent in the new small businesses. Many North Korean women were housewives or held less-demanding jobs than men. Their husbands continued to go to their factories, which had come to a standstill. The males received rationing coupons that were hardly worth the paper on which they were printed. But North Korean men still saw the situation as temporary and were afraid to lose the trappings of a proper state-sponsored job that for decades had been a condition for survival in their society. While men were waiting for resumption of “normal life”, whiling away their time in idle plants, the women embarked on frenetic business activity. Soon some of these women began to make sums that far exceeded their husbands’ wages.

The booming markets are not the only place for retail trade. A new service industry has risen from the ashes: private canteens, food stalls and inns operate near the markets. Even prostitution, completely eradicated around 1950, made a powerful comeback as desperate women were eager to sell sexual services to the newly rich merchants. Since no banking institution would serve private commercial operations, illegal money lenders appeared. In the late 1990s they would charge their borrowers monthly interests of 30-40%. This reflected very high risks: these lenders had virtually no protection against the state, criminals and, above all, bad debtors.

In North Korea, which for decades was so different, this meant a revolution. The new situation undermined the government’s ability to control the populace. People involved in the new market activities are independent from (or inured to) subtle government pressures that had ensured compliance for decades. One cannot promote or demote a vendor, transfer him or her to a better or worse job, nor determine his or her type of residence (though admittedly, most people still live in the houses they received when the old system was still operating).

The growth of new markets also undermined some pillars of old North Korean hierarchy. Of course, many people who became affluent in the new system came from the old hierarchy – as was the case in most post-communist countries. Officials or managers of state-run enterprises found manifold ways to make an extra won. These managers often sold their factories’ products on the market. But many hitherto discriminated-against groups managed to rise to prominence during this decade. The access to foreign currency was very important, and in North Korea there were three major groups who had access to some investment capital: the Japanese-Koreans, Chinese-Koreans and Korean-Chinese.

The Japanese-Koreans moved into the country in the 1960s (there were some 95,000 of them – with family members, children and grandchildren, their current number can be estimated at 200,000-250,000). These people have relatives in Japan who are willing to send them money. Traditionally, the authorities looked at Japanese-Koreans with suspicion. At the same time, since money transfers from Japan have been a major source of hard currency for Pyongyang, their activities were often tolerated. This particular group even enjoyed some special rights, being privileged and discriminated against at the same time. When the old system of state control and distribution collapsed, Japanese-Koreans began to invest their money into a multitude of trade adventures. It did not hurt that many of them still had the first-hand experience of living in a capitalist society.

Another group were people with relatives in China. The economic growth of China meant that the relatives could also help their poor relatives in North Korea. In most cases, this was not in the form of money transfers, but assistance in business and trade. The local ethnic Chinese were in an even better position to exploit the new opportunities. For decades, they have constituted the only group of the country’s inhabitants who could travel overseas as private citizens more or less at their will. Even in earlier times, the ethnic Chinese used this unique position to earn extra money by small-scale and part-time smuggling. In the 1990s, they switched to large operations. There is an irony in the sudden economic advance of these groups. For decades, their overseas connections have made them suspect and led to systematic discrimination against them. In the 1990s, however, the same connections became the source of their prosperity.

Until recently, the government did not try to lead, but simply followed the events. The much-trumpeted reforms of 2002 by and large were hardly anything more than the admission of the situation that had been existing for a few years by then. The official abolition (or near-abolition) of the public distribution system did not count for much, since this system ceased to operate outside Pyongyang around 1995.

But the North Korean economy has indeed come a long way from its Stalinist ways. Now the government has neither money nor support nor the political will to revive the Stalinist-style central economy. There is no way back, only forward. Stalinism is dead. Welcome to capitalism, comrades!

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North Korea Development Report 2003/04

Friday, July 30th, 2004

KIEP has published the North Korea Development Report 2003/04 (follow the link to download all several hundred pages!)

Summary: As a result of North Korea’s isolation from the outside world, international
communities know little about the status of the North Korean economy and its
management mechanisms. Although a few recent changes in North Korea’s economic system have attracted international interests, much confusion remains as to the characteristics of North Korea’s recent policy changes and its future direction
due to the lack of information. Therefore, in order to increase the understanding of readers in South Korea and abroad, KIEP is releasing The North Korea Development Report in both Korean and English. The motivation behind this report stemmed from the need for a comprehensive and systematic investigation into North Korea’s socio-economic conditions, while presenting the current status of its industrial sectors and inter-Korean economic cooperation. The publishing of this second volume is important because it not only supplements the findings of the first edition, but also updates the recent changes in the North Korean economy. The topics in this report include macroeconomics and finance, industry and infrastructure, foreign economic relations and inter-Korean economic cooperation, social welfare and science & technology.

This report also covers the ‘July 1 Economic Reform’ launched two years ago and
subsequent changes in the economic management system. The North Korea
Development Report helps to improve the understanding of the contemporary North
Korean economy.
Table of Contents  
 
Part I Macroeconomic Status and Finance
Chapter 1 Current Status of the North Korean Economy and Its Prospects
Chapter 2 National Financial Revenue and Expenditure
Chapter 3 Banking and Price Management

Part II Industrial Management and Problems
Chapter 4 The Industrial Sector
Chapter 5 The Agricultural Sector
Chapter 6 Social Overhead Capital
Chapter 7 Commerce and Distribution Sector
Chapter 8 The Defense Industry

Part III International Economic Activities
Chapter 9 Foreign Economic Relations
Chapter 10 Special Economic Zones
Chapter 11 Inter-Korean Economic Relations

Part IV Social Security and Technology Development
Chapter 12 Social Security and Social Services
Chapter 13 Science and Technology Sector

Part V The Recent Economic Policy Changes
Chapter 14 The Contents and Background for the Recent Policy Changes
Chapter 15 The Features and Problems of the Recent Economic Policy Changes
Chapter 16 Prospects and Future Tasks of the July 1 Economic Reform  

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Through a glass, darkly

Thursday, March 11th, 2004

The Economist
3/11/2004

So far as a visitor can tell in this secretive land, North Korea’s economic reforms are starting to bite. But real progress will require better relations with the outside

COMMUNIST North Korea has started to experiment with economic reform, and opened its door a crack to the outside world. Though its culture of secrecy and suspicion stubbornly persists, it was deemed acceptable for your correspondent to visit Pyongyang’s Tongil market last week. Here, stalls are bursting with plump vegetables and groaning with stacks of fresh meat. You can even buy imported pineapples and bananas from enthusiastic private traders.

But how about a photograph? Most foreigners think of North Korea as a famished nation, and the authorities are evidently keen these days to tell the world about the great strides their economy has made since reforms were introduced in July 2002. Logic might seem to suggest that a snap showing the palpable result of the reforms would be acceptable too. But it is not. The officials were friendly but firm: no pictures of fat carrots.

The July 2002 reforms were ground-breaking for North Korea: the first real step away from central planning since the dawn of communism there in 1945. The government announced that subsidies to state-owned enterprises were to be withdrawn, workers would be paid according to how much they produced, farmers’ markets, hitherto tolerated, would become legal and state enterprises would be allowed to sell manufactured products in markets. Most of these enterprises, unless they produced “strategic items”, were to get real autonomy from state control.

Almost two years on, how to assess the success or failure of these reforms? That climate of secrecy makes it deeply frustrating. Even the simplest of statistics is unavailable. Li Gi Song, a senior economist at Pyongyang’s Academy of Sciences, says he does not know the rate of inflation. Or maybe he is not telling. After all, he says, “We can’t publish all the figures because we don’t want to appear bare before the United States. If we are bare then they will attack us, like Afghanistan or Iraq.” So what follows can be little more than a series of impressions.

The indications are that the reforms are having a big impact. For a start, North Korea has recently acquired its first advertisement (pictured above)—for foreign cars, assembled locally by a South Korean majority-owned company. Or, to be more basic, take the price of rice, North Korea’s staple. Before the reforms, the state bought rice from state farms and co-operatives at 82 chon per kilo (100 chon make one won, worth less than a cent at the official exchange rate). It then resold it to the public through the country’s rationing system at eight chon. Now, explains Mr Li, the state buys at 42 won and resells at 46 won.

North Korea’s rationing system is called the Public Distribution System (PDS). Every month people are entitled to buy a certain amount of rice or other available staples at the protected price. Thus most North Koreans get 300g (9oz) of rice a day, at 46 won a kilo. According to the UN’s World Food Programme (WFP), that is not nearly enough. Anything extra has to be bought in the market.

In theory, even in the market the price of staples is limited. Last week, the maximum permitted rice price was marked on a board at the entrance to Tongil as 240 won per kilo. In fact, it was selling for 250. WFP officials say that in January it was selling for 145 won, which points to significant inflation, for rice at least. This is not necessarily a bad thing, since it means that the price is coming into line with the market.

The won’s international value is also adjusting. Since December 2002, the euro has been North Korea’s official currency for all foreign transactions. In North Korean banks, one euro buys 171 won. In fact, this rate is purely nominal. A semi-official rate now exists and the price of imports in shops is calculated using this.

Last October, according to foreign diplomats, a euro bought 1,030 won at the semi-official rate. Last week it was 1,400. A black market also exists, in which the euro is reported to be fetching 1,600 won—which implies that the won is approaching its market level. It also means, however, that imported goods have seen a big price-hike. For domestically-produced goods, like rice, prices may well go on rising for a good while longer.

What about earnings? Before the 2002 reforms, most salaries lay in the range of 150-200 won per month. Rent and utilities, though, were virtually free, as were (and are) education and health care. Food, via the PDS, was virtually given away. Now, pay is supposed to be linked to output, though becoming more productive is not easy for desk-bound civil servants or workers in factories that have no power, raw materials or markets.

Rents and utilities have gone up, though not by crippling amounts. A two-bedroom flat in Pyongyang including electricity, water and heat costs just 150 won a month—that is, about a tenth of a euro.

Earnings have gone up much more: a waitress in a Pyongyang restaurant earns about 2,200 won a month. A mid-ranking government official earns 2,700. A worker at a state farm earns in the region of 1,700, a kindergarten teacher the same, and a pensioner gets between 700 and 1,500. A seamstress in a successful factory with export contracts can earn as much as 5,000 won a month. Since that seamstress’s pay equates to barely three euros a month, wages still have a long way to adjust.

The prices of food and other necessities, to say nothing of luxuries, has gone up much more than rent has. According to the WFP, some 70% of the households it has interviewed are dependent on their 300 gram PDS ration, and the WFP itself is targeting 6.5m vulnerable people out of a total population of some 23m. Not all suffer equally: civil servants in Pyongyang get double food rations from the PDS.

There are some encouraging stories. In Pukchang, a small industrial town 70km (40 miles) north-east of Pyongyang, Concern, an Irish aid group, has been replacing ancient, leaking and broken-down water pipes and pumps, and modernising the purification system. This has pushed the amount of clean water available per person per day from 80 to 300 litres. Kim Chae Sun is a manager at the filtration plant, which is now more efficient. Before July 2002 she earned 80 won a month. Afterwards she earned 3,000 won. Now she earns 3,500.

As Mrs Kim speaks, three giant chimneys belch smoke from the power station that dominates the town. All workers have been told they can earn more if they work harder, but certain groups have been told they will get even more money than everyone else. In energy-starved North Korea these include miners and power workers. Mrs Kim says her husband, who works in the power plant, earns an average of 12,000 won a month. Her rent has gone up from eight to 102 won a month, and in a year, she thinks, she will be able to buy a television or a fridge.

A lot of people, in fact, are buying televisions. The women who sell the sets from crowded Tongil market-stalls get them from trading companies which they pay after making a sale. The company price for an average set is 72,000 won, the profit just 1,000 won. After they have paid for their pitch, the traders can expect an income of 10,000-12,000 won a month.

Mystery sales
Which makes for a puzzle. Who can afford a good month’s salary for a locally made jacket in Tongil, costing 4,500 won? How come so many people are buying televisions, which cost more than two years of a civil-servant’s pay? How come the number of cars on the streets of the capital has shot up in the past year? Pyongyang still has vastly less traffic than any other capital city on earth, but there are far more cars around than a year ago. Restaurants, of which there are many, serve good food—but a meal costs the equivalent of at least a white-collar worker’s monthly salary. Many of these restaurants are packed.

Foreign money is part of it. Diplomats and aid workers say many new enterprises seem to have opened over the last year. Nominally they are state-owned, but sometimes they have a foreign partner, often an ethnic Korean from Japan. The majority are in the import-export business. Some have invested in restaurants and hotels and some in light industry. Thanks to the 2002 reforms, these firms have a degree of autonomy they could not have dreamed of before. An unknown number of people also receive money from family abroad, but there are still no North Korean-owned private companies.

Farmers are among the other winners: they can sell any surpluses on the open market. But two out of three North Koreans live in towns and cities, and only 18% of the country is suitable for agriculture. The losers include civil servants, especially those outside Pyongyang who do not get double food rations and have no way to increase their productivity.

Factory workers have it the hardest. A large proportion of industry is obsolete. Though Pyongyang has electricity most of the day, much of the rest of the country does not. Despite wild talk of a high-tech revolution, the country is not connected to the internet, though some high-ups do have access to e-mail service. In the east of the country lies a vast rustbelt of collapsing manufacturing plants.

Huge but unknown numbers of workers have been moved into farming, even though every scrap of available land is already being cultivated. The extra workers are needed because there is virtually no power for threshing and harvesting and no diesel for farm vehicles. This requires more work to be done by hand. Ox-carts are a common sight.

The innocent suffer
Markets are everywhere. But this does not mean that there is enough food everywhere. In Pyongyang, where there are better-off people to pay for it, there is an ever-increasing supply. Outside the capital, shortages are widespread.

No one knows how many died during the famine years of 1995-99; estimates range from 200,000 to 3m. In Pukchang, officials say that 5% of children are still weak and malnourished. In Hoichang, east of Pyongyang, schools and institutions tell the WFP that about 10% of children are malnourished. Masood Hyder, the senior UN official in North Korea, says that vulnerable households now spend up to 80% of their income on food.

And yet some things are improving. Two surveys carried out in 1998 and 2002 by the North Korean government together with the WFP and Unicef showed a dramatic improvement in children’s health between those years. The proportion of children who fail to reach their proper height because of malnutrition fell from 62% to 39%, and the figures are thought to be still better now. However, Unicef says that though children may no longer die of hunger, they are still dying from diarrhoea and respiratory diseases—which are often a side-effect of malnutrition.

To a westerner’s eye, a class of 11-year-olds in Hoichang is a shocking sight. At first, your correspondent thought they were seven; the worst-affected look to be only five. Ri Gwan Sun, their teacher, says that apart from being stunted some of them still suffer from the long-term effects of malnutrition. They struggle to keep up in sports and are prone to flu and pneumonia. They are also slower learners.

Pierrette Vu Thi of Unicef says that North Korea’s poor international image makes it hard for her agency, the WFP and others to raise all the money they need. The country is in a chronic state of emergency, she says, and to get it back on its feet it would need a reconstruction effort on the scale of Afghanistan and Iraq.

Such bleak talk is echoed by Eigil Sorensen of the World Health Organisation. He says that health services are extremely limited outside the capital. Medicines and equipment are in short supply, large numbers of hospitals no longer have running water or heating and the country has no capacity to handle a major health crisis.

None of this is likely to change very fast. With no end yet to the nuclear stand-off between North Korea and the United States, American and Japanese sanctions will remain in place. And nukes are only part of it. Last week the American State Department said it was likely that North Korea produced and sold heroin and other narcotics abroad as a matter of state policy. North Koreans who have fled claim that up to 200,000 compatriots are in labour camps. North Korea denies it all.

Reform, such as it is, has plainly made life easier for many. But rescuing the North would take large amounts of foreign money, as well as measures more far-reaching than have yet been attempted. At present, there is no way for the government to get what it needs from international financial institutions like the World Bank. Such aid as comes will be strictly humanitarian, and investment in so opaque a country will never be more than tentative. Domestic reform on its own cannot fix an economy wrecked by decades of mismanagement and the collapse of communism almost everywhere else.

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N. Korea shifts towards capitalism

Sunday, September 14th, 2003

Washington Post Foreign Service
Anthony Faiola
September 14, 2003

Notes on the DPRK’s new Fiat:

The first commercial billboards (ever) are going up in Pyongyang.  Fiat is in the Hermit Kingdom.  The billboards are part of what is dubbed the first corporate media blitz to hit North Korea.

Pyeonghwa Motor Corps., a South Korean firm with ties to the Unification Church, coaxed the DPRK government into allowing the campaign.  Pyeonghwa began assembling cars in North Korea 18 months ago using imported Fiat parts.

Creating the ad campaign was not easy, said John Kim.  The government rejected many billboard proposals.

The company began publishing asd in government sponsored trade magazines showcasing the “Whistle” (The name of the car in the DPRK.  Named after a famous song).  Also a SUV model was launched.  Commercials have also appeared on TV.

Cars cost $14,000 and it would take a north Korean 15 years of labor to save up enough money.

When Pyeonghwa opened its $20m factory about 40 miles west of Pyongyang last year, the company hoped to sell 1000 cars in 12 months, but it has unloaded only half that number in 18 months.  Most have gone to government officials and diplomats.

There are only two gas stations in Pyongyang, and the company does not offer financing 

Notes on Politics:

Pyongyang’s news agency recently described new markets as desigend to “dramatically improve the country’s standard of living.”

This month, the North Korean’s announced a cabinet reshuffle that raised Pak Pong Ju, a former chemical industries manager, to the loftier position of Premier.  He is seen as being interested in reforms.

Kim Jong Il has been working to give the authority to fire a worker to factory managers, as opposed to Party officials.

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Reforms Turn Disastrous for North Koreans

Monday, January 27th, 2003

Washington Post
John Pomfret
1/27/2003, Page AOl

Nuclear Crisis May Have Roots in Economic Failure

Six months after North Korea announced unprecedented wage and price increases to jump-start its miserable economy, runaway inflation is emptying millions of pocketbooks and bottlenecks in production are causing widespread shortages, according to Chinese and North and South Korean sources.

The black market price of rice, the staple of the Korean diet, has jumped more than 50 percent over the past three months in most parts of the country while tripling in others, according to North Koreans, Chinese businessmen and Western aid agency workers. Some factories in poorer parts of the country, such as the heavily industrialized east coast, have stopped paying workers the higher salaries that were a cornerstone of the reforms, recent North Korean arrivals to China said. Others have taken to paying workers with coupons that can be exchanged for goods, they said, but there are no goods in the stores to buy.

“Theft new economic policy has failed,” said Oh Seung Yul, an economist at the government-funded Korea Institute for National Unification in Seoul. “The hopes that were raised in July are today pretty much dashed.”

The apparent failure of North Korea’s attempt to promote economic activity and improve living standards constitutes an important backdrop for its recent threats to resume a nuclear weapons program, according to the sources.

On one hand, Oh and others said, North Korea’s isolated government needed a scapegoat. On the other, according to Chinese sources close to the secretive government of Kim Jong Ii, Pyongyang has determined that it risks economic collapse without security guarantees and access to international lending institutions such as the World Bank and International Monetary Fund, to which the United States holds the keys. So Kim manufactured a crisis to win concessions, they said.

“Now the economic situation is more precarious than before the reforms. They can’t do this halfway,” said Cui Yingjiu, a Chinese Korean economist and adviser to the North Korean government. “They risk social chaos and economic collapse.”

The crisis has been exacerbated by a drop in the humanitarian aid that had kept North Korea on life support since 1995. Because of a shortage of donations, the World Food Program has cut back the number of North Koreans it is assisting this year from 6.4 million to 3.5 million of the country’s estimated 22.6 million inhabitants. In September, the elderly and primary school-age children on the west coast were cut off. In October, kindergarten-age children, pregnant women and nursing mothers there lost out. In November, nurseries were scratched from the list.

“It’s a tough call deciding who has to be deprived,’ said Gerald Bourke, an official with the World Food Program in Beijing. Bourke said the recent “very rapid inflation” of rice prices is “putting food way beyond the pale for a lot of people.”

The World Food Program has 25,000 tons of food in North Korea and pledges of 75,000 additional tons, he said. It needs 511,000 tons this year.

North Koreans traveling over the border to Yanji, about 700 miles northeast of Beijing, said an initial wave of hope triggered by the changes announced in July is gone in almost all parts of the country except the capital, Pyongyang.

Lee Xiangyu, a North Korean refugee in China, was arrested by Chinese border police and returned to North Korea last summer, when the changes began. After a short stint in jail, the 19-year-old returned to her home town, Musan, along the border with China. By October, she said, the lumberyard where her father worked had stopped paying him and other workers the huge raises they had received as part of the effort to promote some aspects of a free-market economy.

But prices continued to rise. “There was no money in my house, and now the prices are so high,” she said. Lee sneaked back into China in December. “It’s not like it was in 1997 when people were starving to death,” she said, speaking of the famine that cost hundreds of thousands of lives. “But it’s worse in a way. Because everybody had hope for a little while and now they are desperate again.”

North Korea’s announcement of economic reforms was front-page news, in part because the measures fit into a series of other moves that led some observers to conclude Kim was ready to lead his country out of isolation. The steps included expression of regret following a clash between North and South Korean naval forces in June, the suggestion that North Korea would hand over Japanese Red Army members wanted in Japan for hijacking a Japanese airliner in 1970, an informal meeting in July between North Korean Foreign Minister Paek Nam Sun and Secretary of State Cohn L. Powell, transportation links between North and South Korea, a summit between Kim and Japanese Prime Minister Junichiro Koizumi and talk of establishing as many as five special zones for foreign investment.

The economic changes included raising prices and wages, devaluing the North Korean won against the dollar and cutting state subsidies for failing businesses. Wages were increased between 900 percent and 1,500 percent. Prices, which are in theory set by the state, went up as well. Rice went up 4,000 percent, corn 3,700, pork 700, diesel fliel 3,700, electricity 5,900, apartment rent 2,400 and subway tickets 900.

The government announced that factories with bloated workforces could effectively lay off unnecessary workers so they could concentrate on making things again — a step North Korean industry had not taken since economic troubles began in 1995.

The main motivation for increasing the price of rice was to prompt farmers to plant more food. But Cui, who attended a conference on North Korea’s economic changes last fall in Pyongyang, said farmers were not happy.

“Grain prices went up, but so did prices for inputs like fertilizers and seeds,” he said. ‘So all gains were canceled out.”

Another issue, Cui said, is electricity. North Korea has good hydropower resources, but as farmers become interested in planting more crops, they will want to use water in reservoirs for irrigation, not for power generation. “There are a whole series of these conundrums and Catch 22s,” Cui said.

He said North Korean factories have yet to begin producing goods people want to buy. That is why trucks rolling into China from the Dandong border crossing, 350 miles southwest of Yanji, now carry clothes, television sets, shampoo and other consumer goods.

The changes befliddled Western and Chinese economists from the beginning. Chinese experts noted that when China undertook its first major economic reform in 1979, it increased the price of grain by only 25 percent. Second, they said, when China began this process, 80 percent of its population lived in rural areas, so there was a huge pooi of potential beneficiaries from the liberalized agricultural policies. But North Korea is highly industrialized: Two-thirds of its people live in cities.

Marcus Noland, at the Institute for International Economics in Washington, speculated that the changes were either a desperate attempt to jump-start a half-dead economy or a backhanded attack against North Korea’s nascent private economy. Increasing prices would reduce the value of currency held outside the state system, breaking the back of private entrepreneurs.

But then again, he said in a recent paper, “the possibility that economic decisions are being made by people who do not grasp the implications of their actions should not be dismissed toohastily.”

Correspondents Doug Struck and Peter £ Goodman in Seoul contributed to this report

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The Nautilus Institute primer on the DPRK

Tuesday, November 26th, 2002

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The Nautilus Institute has created the DPRK Briefing Book to enrich debate and rectify the deficiencies in public knowledge. Our goal is that the DPRK Briefing Book becomes your reference of choice on the security dilemmas posed by North Korea and its relations with the United States. The DPRK Briefing Book is part of the Nautilus Institute’s “US-DPRK Next Steps: Avoiding Nuclear Proliferation and Nuclear War in Korea” project.

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North Korea: A Nation in the Dark

Saturday, October 19th, 2002

Time
Donald McIntyre
10/19/2002

Lee Mi Young crossed the Tumen River from North Korea into China a month ago. Now she is hiding in a safe house in China, getting help from a Chinese-Korean missionary, and hoping to start a new life. She is terrified to be talking to the first foreigner she has ever seen, more so because she is painting a negative picture of her country. She could be executed in North Korea for this conversation (Lee Mi Young is a pseudonym).

In her mid-30s, with pretty, bright brown eyes and carefully stenciled eyebrows, Lee says she left North Korea because she was tired of never having quite enough to eat. Things are better than they were during the famine of the mid-’90s, but they have begun to deteriorate since July when North Korea announced a series of economic reforms that many observers said signaled the start of a serious effort to fix the country’s collapsed command economy. The government raised the salaries of workers such as miners and teachers, increased the cost of state rations such as rice and allowed the North Korean won to fall to about 150 to the dollar, much closer to its real black-market value than the 2.5 won to the dollar at which it had previously been pegged.

Lee says that in her hometown north of Pyongyang (she prefers we don’t name it) the price of grain in the black market has risen, but people can’t afford to buy it: Although salaries have been raised, the government has only actually paid them once since July. People need to supplement meager government rations with rice bought at exorbitant prices on the black market. “This was a reform for the rich,” says Lee. “Things are worse than before.”

Kim Jung Il is still fully in control of the country, analysts say. There are periodic reports of small signs of dissent — anti-government leaflets and graffiti, for example. Some defectors say family members will complain among themselves and possibly with friends. But North Korean defectors say that everyone is aware that anybody caught protesting publicly will be sent to a harsh prison camp, where they will be joined by members of their family. Lee, the young woman who fled last month, says she saw an old lady standing in line waiting for rations in August who suddenly said: “It is so difficult to live here. I can’t stand this.” Almost immediately, a man came up, tapped her on the shoulder and led her away. Other members of her family later disappeared without explanation.

What has changed in the past few years is the amount of knowledge about the outside world flowing into the country. Hundreds of aid workers have been in and out of the country in recent years, bringing with them new ideas and information. Thousands of North Koreans have crossed across the Tumen River into China attempting to flee or simply looking for food. Many come back not only with food, but also bearing tales of the wonders of China’s booming cities and stores brimming with goods. According to one defector, Chinese-Koreans are bringing cell phones into North Korea, using them along the border and even leaving them behind for relatives to use — in a country where ordinary people don’t have landline phones in their homes.

For impoverished North Koreans, China’s flashy modern cities seem like paradise and many dream of going there. There is much more knowledge about South Korea as well. North Korean propaganda for years portrayed the South as a land of beggars oppressed by a rich elite. Many average North Koreans now know that isn’t true, according to defectors. One reason: North Korean sailors, traders and workers who have been to places like Cuba and Libya come back with video tapes of American action movies. These are secretly circulated, with eager audiences gathering at the house of the very rare family rich enough to have a VCR player, sometimes with an English-speaker on hand to translate the dialogue. A record 600 North Korea defectors arrived in Seoul last year — this year’s figure could top 1,000.

Some analysts argue the clash in the West Sea on June 29 (in which North Korea patrol boats fired on South Korea naval vessels, killing five sailors) was the work of disgruntled military leaders trying to warn Kim Jong Il to keep a lid on change. The conventional wisdom has always been that North Korea is afraid to open the door a crack because the system could unravel so quickly. Some defectors and aid workers report that there is a sense of instability and uncertainty in the country right now. Rather than the start of reform, we may be seeing a country starting to unravel already.

When I visited Pyongyang in August, it looked better than it had even six months earlier. There were open-air restaurants offering grilled meat — just like in Seoul — and people looked healthy and even vibrant. But the capital has always been an oasis reserved for party members and North Koreans loyal to the regime. Aid workers and diplomats say smaller cities lack regular electricity and people still can’t get enough to eat. They probably aren’t starving but malnutrition remains widespread.

North Koreans who live in the countryside may be marginally better-off than their urban cousins, because they are able forage for wild plants in the mountains and are allowed to grow vegetables on small private plots. Life is harsh for city dwellers dependent on the industrial economy. On the road from Pyongyang to the northeast corner of the country, you pass mile after mile of rusting factories — probably less than one third of the country’s factories are actually running.

A Korea-American businessman who visited the city of Kaesong recently was shocked to learn it had had no electricity for 10 days. The only electric lights shining at night in Kaesong those illuminating monuments to the late “Great Leader” Kim Il Sung. Many city have electricity at certain times of the day. Foreign reporters who visited Shinuiju last month, for the unveiling of a plan to turn it into a free economic zone designed to lure investors, were struck by the contrast with the neighboring Chinese city of Dandong. Dandong at night is a blaze of lights; across the river, Shinuiju is in near-total darkness. Apartment blocks in Pyongyang are lit at night these days, but there are few lights outdoors — except, of course, those illuminating the gigantic statue of the “Great Leader.”

To make a go of “special economic zones” such as Shinuiju, North Korea needs to massive foreign investment to rebuild its electrical grid and other key infrastructure. The country has never been self-sufficient in food and needs an industrial economy to make fertilizer to boost agricultural yield and to finance food imports to make up the shortfall. But the disappearance of foreign subsidies following the collapse of the Soviet Union saw a rapid de-industrialization — until the late 1960s, it had been ahead of South Korea economically. North Korea is now dependent on international food aid and donations of fertilizer, and desperately needs to get on the right side of the U.S. in order to get the loans it desperately needs from the World Bank — loans that the U.S. is now blocking. That has many South Korean analysts suggesting that the reason Pyongyang sudden nuclear confession is precisely that it hopes to put its nuclear weapons program on the table and trade it away for economic gains and security guarantees from Washington.

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Great summary of recent events: trade, economic reform

Monday, October 14th, 2002

From the Institute for International Economics:

West-Bound Train Leaving the Station: Pyongyang on the Reform Track

Marcus Noland
Institute for International Economics

Paper prepared for the Council on US-Korea Security Studies
Seoul, Korea
October 14-15, 2002

Marketization

The North Korean economic reforms that began in July 2002 have four components: marketization, inflation, special economic zones, and aid-seeking. Marketization, in turn, has several features.1 The government appears to be attempting to adopt a dual-price strategy similar to what the Chinese have implemented in the industrial sphere. In essence the Chinese instructed their state-owned enterprises to continue to fulfill the plan, but once planned production obligations were fulfilled, the enterprises were free to hire factors and produce products for sale on the open market. In other words, the plan was essentially frozen in time, and marginal growth occurred according to market dictates.

The government has announced a scrapping/downsizing/attenuation of the system of distributing goods and services through rationing (including the public distribution system (PDS) for food), meaning that at the household or retail level, the allocation of goods will increasingly occur through markets and on market terms. (Two exceptions are health care and education that will continue to be supplied gratis by the state.)

One can question the extent to which this is a real policy change and how much this is simply a ratification of system—fraying that had already occurred—there is considerable evidence that most food, for example, was already being distributed through markets, not the PDS. In this respect, the North Korean move could be interpreted as an admission that the genie is out of the bottle.

On the production side, enterprises have been instructed that they are responsible for covering their own costs—that is, no more state subsidies. Modest changes in the organization of production have been introduced in agriculture and there are rumors that more dramatic changes in the agricultural sector are on their way. Yet it is unclear to what extent managers outside of agriculture have been given the power to hire, fire, and promote workers, or to what extent remuneration will be determined by the market. Moreover there has been no mention of the military’s privileged position within the economy and domestic propaganda continues to speak of a “military-first” political path.

The state has administratively raised wage levels, with certain favored groups such as military personnel, party officials, scientists, and coal miners receiving supernormal increases. (For example, while it has been reported that military personnel and miners have received wage increases on the order of 1,500 percent, the increases for office workers and less essential employees are less, and the estimated income increase for agricultural workers may be on the order of 900 percent.) This alteration of real wages across occupational groups could be interpreted as an attempt to enhance the role of material incentives in labor allocation.

The state continues to maintain an administered price structure, though by fiat, the state prices are being brought in line with prices observed in the farmers’ markets. This is problematic (as it has proven in other transitional economies): the state has told the enterprises that they must cover costs, yet it continues to administer prices, and in the absence of any formal bankruptcy or other “exit” mechanism, there is no prescribed method for enterprises that cannot cover costs to cease operations, nor, in the absence of a social safety net, how workers from closed enterprises would survive. What is likely to occur is the maintenance of operations by these enterprises supported by implicit subsidies, either through national or local government budgets or through recourse to a reconstructed banking system. Indeed, the North Koreans have sent officials to China to study the Chinese banking system, which although may well have virtues, is also the primary mechanism through which money-losing state-owned firms are kept alive.

Inflation

The likelihood is increased by the second component of the economic policy change, the creation of enormous inflation. At the same time the government announced the marketization initiatives, it also announced tremendous administered increases in wages and prices (Table 1). To get a grasp on the magnitude of these price changes, consider this: when China raised the price of grains at the start of its reforms in November 1979, the increase was on the order of 25 percent. In comparison, North Korea has raised the prices of corn and rice by nearly 4,000 percent. In the absence of huge supply responses, the result will be an enormous jump in the price level and possibly even hyperinflation.

Moreover, when China began its reforms in 1979, more than 70 percent of the population was in the agricultural sector. (The same held true for Vietnam when it began reforming the following decade.) In contrast, North Korea has perhaps half that share employed in agriculture. This has two profound implications: first, the population share, which is directly benefiting from the increase in producer prices for agricultural goods, is roughly half as big as in China and Vietnam. This means that reform in North Korea is less likely to be what economists call Pareto-improving (in other words a change in which no one is made worse off) than the cases of China or Vietnam. Instead, reform in North Korea is more likely to create losers and with them the possibility of unrest. Second, the relatively smaller size of the agricultural sector suggests that the positive supply response will not be as great in the North Korean case as compared to China or Vietnam either. Again, this increases the likelihood of reform creating losers and unrest.

In the short run, the initial jump in the price level is usually accompanied by an increase in economic activity, as households and enterprises mistake increases in the overall price level for changes in relative prices. This is likely to be particularly acute in North Korea, where many households and enterprises can be expected to be relatively naïve about market economics, and where significant alterations in the structure of relative prices will be coincident with the rapid increase in the price level. So in the short run, there may be an increase in economic activity.

In the longer run however, once households and enterprises begin to distinguish more clearly between changes in relative and absolute prices, it will become apparent that some parts of the population have experienced real increases in income and wealth, while others have experienced real deteriorations. The North Koreans have not announced any mechanism for periodically adjusting prices, so in all likelihood, disequilibria, possibly severe, will develop over time. Access to foreign currency may act as insurance against inflation, and in fact, the black market value of the North Korean won has dropped approximately 50 percent since the reforms were announced.

Those with access to foreign exchange such as senior party officials will be relatively insulated from this phenomenon. Agricultural workers may benefit from “automatic” pay increases as the price of grain rises, but salaried workers without access to foreign exchange will fall behind. In other words, the process of marketization and inflation will contribute to the exacerbation of existing social differences in North Korea. Given how stressed a society North Korea has become, the implications for “losers” could be quite severe. It would not be at all surprising to observe a significant increase in mortality rates.

Make no mistake about it: North Korea has moved from the realm of elite, to the realm of mass politics. Unlike the diplomatic initiatives of the past several years, these developments will affect the entire population, not just a few elites. And while there is a consensus that marketization is a necessary component of economic revitalization, the inflationary part of the package would appear to be both unnecessary and destructive. (If one wanted to increase the relative wages of coal miners by 40 percent, one could simply give them a 40 percent raise–one does not need to increase the overall price level by a factor of 10, and the nominal wages of coal miners a factor of 14 to effect the same real wage increase.)

So why do it? There are at least three possible explanations. The first, as alluded to above, is the most benign: by creating inflation, the government hopes to provide a short-run kick-start to the economy, the long-run implications be damned. (From the standpoint of North Korean policymakers, Keynes’ aphorism, “in the long run we are all dead” may apply with a rather short time horizon.) Given the extremely low levels of capacity utilization in the North Korean economy, this argument has a certain surface plausibility. Yet the problems of the North Korean economy run far, far deeper than underutilized resources. In large part the economy is geared to produce goods (televisions and radios without tuners, to cite one example, or Scud missiles, to give another) for which there is only limited demand. Unless there is a significant reorientation in the composition of output, it is unlikely that inflation alone will generate a sizeable supply response. Even agriculture is problematic in this regard: North Korean agriculture is highly dependent on industrial inputs (chemical fertilizers and agricultural chemicals, for example) and agriculture could be disrupted if the farmers find themselves getting squeezed on the input side.

A second possibility is that the inflation policy is intentional, and is a product of Kim Jong-il’s reputed antipathy toward private economic activity beyond state control. One effect of inflation is to reduce the value of existing won holdings. (For example, if the price level increases by a factor of 10, the real value of existing won holdings is literally decimated.) Historically, state-administered inflations and their cousins, currency reforms, have been used by socialist governments to wipe out currency “overhangs” (excess monetary stock claims on goods in circulation), more specifically to target black marketers and others engaged in economic activity outside state strictures, who hold large stocks of the domestic currency. (In a currency reform, residents are literally required to turn in their existing holdings—subject to a ceiling, of course—for newly issued notes.) In July it was announced that the blue won (Korean People’s Won) foreign exchange certificates would be replaced by the normal brown won, though it is unclear if these are convertible into foreign currency. In the case of North Korea, the episode that is now unfolding will be the fourth such one in the country’s five-decade history.

The hypothesis has the strength of linking what appears to be a gratuitous economic policy to politics-Kim Jong-il not only rewards favored constituencies by providing them with real income increases and by going the inflation/currency reform route, but he also punishes his enemies. This line of reasoning is not purely speculative: it has been reported that one of the motivations behind unifying prices in the PDS and farmers’ markets has been to reduce the need of consumers to visit farmers’ markets, and to “assist in the prevention of “illegal sales activities” which took place when the price in the farmers’ market was much higher than the state price” (CanKor, 9 August 2002). A number of unconfirmed reports indicate that the government has placed a price ceiling on staple goods in the farmers’ markets as an anti-inflationary device. The increase in the procurement price for grain has reportedly been motivated, at least in part, to counter the supply response of the farmers, who were diverting acreage away from grain to tobacco, and using grain to produce liquor for sale.

The problem with this explanation is that having gone through this experience several times in the past, North Korean traders are not gullible: they quickly get out of won in favor of dollars, yen, and yuan. Indeed, even North Koreans working on cooperative farms reportedly prefer trinkets as a store of value to the local currency. As a consequence, this blow aimed at traders, may fall more squarely on the North Korean masses, especially those in regions and occupations in which opportunities to obtain foreign currencies are limited.

As an economist I am trained to assume rationality, and it is only with reluctance that I propose arguments that presume ignorance. But my personal experience in China suggests one more possible explanation for the North Korean policy. Demand and supply are not quantities or points—they are schedules indicating quantities as a function of prices. Market-determined prices are thus a signal of scarcity value reflecting underlying demand and supply. Conversations with Chinese officials in the early to mid-1980s, during the first stage of the marketizing reforms, however, revealed that fundamental misunderstanding of the nature of markets was widespread, especially among older officials who had spent many years in a planned economy.

The North Koreans have indicated that they are trying to unify (or at least reduce the differences between) state prices and those observed in the farmers’ markets. In a press report, one unnamed official laid out the logic of the price reform: the administered price of rice would be raised to the farmers’ market price, but since no one could afford rice at the market price, everyone’s nominal wages would be increased commensurately. What this official did not seem to grasp was that the amount of won in circulation was instantly increased by a factor of 10 due to the wage increase, unless there was an immediate supply-response, then the government had effectively caused a 900 percent jump in the price level.

Again, political considerations increase the plausibility of this argument. By all reports, the economic policy changes being undertaken in North Korea are being devised by a small number of senior officials. Moreover, North Korea has a political system in which the political space of discussion and dissent is highly constricted, and the penalties for being on the wrong side of a political dispute can be quite severe. So while the logic of too many won chasing too few goods would seem elementary to those of us raised in market economies, under the circumstances that exist in North Korea, the possibility that economic decisions are being made by people who do not grasp the implications of their actions (or are afraid to voice their reservations and instead engage in preference falsification if they do) should not be dismissed too hastily.

Special Economic Zones

The third component of the North Korean economic policy change is the formation of special economic zones of various sorts. The first such zone was established in the Rajin-Sonbong region in the extreme northeast of the country in the mid-1980s. It has proved to be a failure for a variety of reasons including its geographic isolation, poor infrastructure, onerous rules, and interference in enterprise management by party officials. The one major investment has been the establishment of a combination hotel/casino/bank. Given the obvious scope for illicit activity associated with such a horizontally integrated endeavor, the result has been less Hong Kong than Macau North.

The 1998 agreement between North Korea and Hyundai that established the Mt. Kumgang tourist venture also provided for the establishment of an industrial park to be managed and operated by Hyundai. While the tourism project was obviously the centerpiece of the agreement, from the standpoint of revitalizing the North Korean economy, the establishment of the industrial park, which would permit South Korean small- and medium-sized enterprises (SMEs) to invest in the North with Hyundai’s implicit protection, was actually more important. In the long run, South Korean SMEs will be a natural source of investment and transfer of appropriate technology to the North. However, in the absence of physical or legal infrastructure, they are unlikely to invest. The Hyundai-sponsored park would in effect address both issues. (The chaebols, because of their size and political connections, would not be so reliant on formal rules—they could always go to the South Korean government if they encountered trouble in the North.) The subsequent signing of four economic cooperation agreements between the North and South on issues such as taxation and foreign exchange transactions could be regarded as providing the legal infrastructure for economic activity by the politically noninfluential SMEs.

The North Korean government and the South Korean firm then negotiated for 18 months over the location of the zone, with the North Koreans wanting it in Sinuiju, a city of some symbolic political importance in the northwest of the country on the Chinese border, and Hyundai wanting to locate the park in the Haeju district, more easily accessible to South Korea. In the end, it was agreed that the park would be located in Kaesong-a decision that was hailed at the time as reflecting an increased emphasis on economic rationality in North Korea.

The industrial park at Kaesong has not fulfilled its promise, however: Hyundai’s dissolution forced the South Korean parastatal KOLAND to take over the project, and the North Koreans inexplicably failed to open the necessary transportation links to South Korea on their side of the demilitarized zone (DMZ). Hence the September 2002 initiation of activity on the northern side of the DMZ could be an important step in the take-off of the Kaesong industrial park.

In September 2002 the North Korean government announced the establishment of a special administrative region (SAR) at Sinuiju. In certain respects the location of the new zone was not surprising: the North Koreans had been talking about doing something in the Sinuiju area since 1998. Yet in other respects the announcement was extraordinary. The North Koreans announced that the zone would exist completely outside North Korea’s usual legal structures; that it would have its own flag and issue its own passports; and that land could be leased for fifty years.

To top it off, the North Koreans announced that the SAR would be run by Yang Bin, a somewhat shady Chinese—born entrepreneur with Dutch citizenship who was under investigation for tax evasion in China, and had reportedly fled to North Korea-though he does not speak Korean—during two previous investigations. (Among his various business interests, Yang operates a Dutch-style village in Shenyang complete with a windmill and imitations of Amsterdam buildings. Kim Jong-il, who knows a thing or two about fantasylands, has visited it himself.) At the time of Yang’s appointment, trading in shares of his firm, Euro-Asia Agriculture Holdings, had been suspended on the Hong Kong stock exchange after crashing on the suspicion of fraud. When asked about Yang’s appointment, China’s Foreign Ministry spokesperson declined to endorse it. To paraphrase Senator Lloyd Bentsen’s memorable line from the 1988 US Vice Presidential debate, “Mr. Yang, you are no Tung Chee Hwa.” Indeed, Mr. Yang was subsequently arrested by Chinese authorities. Whether the zone will survive his arrest remains to be seen.

Assuming that these are mere growing pains, the question arises as to how important the Sinuiju SAR may prove to be. It should promote economic integration between North Korea and China, though one should keep in mind that China is a big place and that the most economically dynamic parts are in the southern coastal areas far from North Korea. But the North Korean economy is so far down that even integration with a comparative backwater like Dandong could be a boost.

More important is whether the SAR will generate any spillovers. In conventional terms this will depend on whether any lessons from the Sinuiju SAR experiment are generalized to the rest of the economy. (One ray of hope in recent events is the removal of the less than 50 percent foreign ownership ceiling in joint ventures.) More subtly the SAR might have a positive impact if internally it is regarded as giving Kim Jong-il’s unimpeachable imprimatur to the reform process. Bureaucrats and factory managers who have been reluctant to get ahead of the leadership may take this as a sign that change is safe. Conversely, by taking the SAR completely outside of the normal North Korean governing structures, Kim Jong-il can in effect end-run the party and the bureaucracy, and manage the zone directly out of his office.

Uncle Junichiro…

Meanwhile, as exciting as the establishment of the Sinuiju SAR might have been, its long-run significance is probably less than that of an event that had occurred the previous week—a meeting in Pyongyang between Kim Jong-il and Koizumi Junichiro, a manifestation of the fourth component of the economic plan, passing the hat.

At the first-ever meeting between the heads of government of Japan and North Korea, Kim stunned the world by baldly admitting that North Korean agents had kidnapped 12 Japanese citizens and that most of the abductees were dead. Each of the leaders then expressed regrets for their countries’ respective historical sins and agreed to pursue diplomatic normalization. It is expected that normalization will be accompanied by a large financial transfer from Japan to North Korea in the form of grants, subsidized loans, and trade credits. Japanese officials have not denied formulas reported in the press that would put the total value of a multiyear package at approximately $10 billion, despite the shaky state of Japanese public finances. Taking inflation, changes in the value of the yen, differences in population size, and other factors into account, this sum would be in the ballpark of the transfer that Japan made to South Korea in 1965 when the two countries normalized relations. Given the puny size of the North Korean economy, this is a gigantic sum. The critical issue for North Korea is whether these talks will proceed rapidly enough to generate aid inflows before the dislocations of marketization begin to bite. Given the Japanese public’s revulsion at the disclosure of the probable murders of some of the abductees, the process of normalization may be more protracted than either the North Korean or Japanese governments expected.

In connection with this process, there are rumors that the North Koreans intend to establish yet another special economic zone on the east coast, to be oriented toward Japan. Discounting the failed zone at Rajin-Sonbong, this would give the North Koreans three special economic enclaves, one oriented toward South Korea, one toward China, and one toward Japan, diversifying their portfolios so to speak. Again, given the centrality of politics to North Korean thinking, they may well envision playing the three off against each other. In the long run, however, it is integration with South Korea that will be critical to the development of the North Korean economy.

…and Uncle Sam

The Koizumi visit amounted to a kick in the pants to the Bush Administration. It brought to a head the disagreement between the hawks and the moderates in Washington. Assistant Secretary of State James Kelly was sent to Pyongyang with greater alacrity than he otherwise would have had. With its two allies in Northeast Asia moving forward with engagement, the “Axis of Evil” characterization will become increasingly difficult to sustain, and the United States will find its options more constrained.

For example, North Korea’s membership on the list of state sponsors of terrorism prevents the United States from supporting the DPRK for membership in international financial institutions such as the International Monetary Fund, World Bank, or Asian Development Bank. The North Koreans have fulfilled most of the terms set out by the Clinton Administration to secure their removal from the list. A major sticking point has been third-party claims by Japan associated with the Japanese Red Army hijackers and the abductees. If the hijackers are returned to Japan and the North Korean and Japanese governments resolve the abductee issue as now seems likely in the near future, a major obstacle to North Korea getting off the list of state sponsors of terror will have been removed. While it is quite possible that the Bush Administration will insist on keeping them on the list and barring their entry into the international financial institutions, this position will be increasingly hard to sustain in the face of South Korean and Japanese objections.

At the same time, the transfer from Japan to North Korea is the single biggest financial claim that North Korea maintains on the international system and dwarfs anything it could hope to get from the multilateral development banks. Unlike the sorts of carrots that the United States might offer, it also contains an element of irreversibility, and no matter how well conditioned the loans, money is at least partly fungible, raising the understandable worry in Washington that the Japanese settlement could be used for military modernization. The apparent lack of consultation between the United States and Japan in the run-up to the meeting has added to Washington’s concerns.

 

Conclusions

In the end, to understand the meaning of what has occurred in the last several months, one has to make some kind of assessment of the motivations behind North Korea’s policy changes. One argument put forward by some North Korea-watchers is that Kim Jong-il has long understood that the North Korean system is irretrievably broken, but that it has taken a long time for him to consolidate power and implement these far-reaching changes. This is hard to believe. Kim Jong-il was reputedly running the country on a day-to-day basis for ten years before his father’s death eight years ago. This means he has in effect been running the country for 18 years and was the uncontested supreme leader for the last eight. In a political system as hierarchical as North Korea’s, it is difficult to accept that it has taken him this long to consolidate his position.

Indeed, the opposite interpretation would seem more plausible, namely, that Kim Jong-il has reluctantly concluded that the old methods are inadequate to revive the economy and out of political necessity is embracing marketization, inflation, and the former colonial master in a desperate bid to revitalize a moribund system. If this interpretation is correct, then we should expect hesitancy in the implementation of reforms, and a strong reliance on the international social safety net supplied by the rest of the world. In certain respects the plans put forward thus far appear to be ill-conceived, but a combination of marginal increases in economic activity and international aid inflows may put enough goods on the shelves to keep the population pacified, at least in the short run. Ten billion dollars can buy a lot of transistor radios.

However, the initiatives undertaken in the last several months are qualitatively different from the diplomatic initiatives that the North Koreans undertook over the last several years. Marketization and inflation alter economic, political, and social relations on the ground, and raise far higher stakes internally. While the upside potential may be great, failure could mean the end of the regime. The train has left the station, but where it is headed and if it will derail are open questions—even for the conductor.

 

Table 1: Price Increases

Product   Reported Price Increase (percent)

Rice   4,000
Corn   3,700
Pork   700

Diesel fuel   3,700
Electricity   5,900

Apartment rent   2,400
Subway ticket   900

Sources: Press reports, private correspondence.

 

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