North Korean Economy Watch

According to the Daily NK:

Recently in South Pyongan Province, the practice of renting out sections of state-run factories to individual entrepreneurs is taking off. This latest development is further evidence of de facto private enterprise flourishing on the back of state facilities.

“There is a factory that manufactures coal mining equipment located in a building that is now partially rented to a donju [literally ‘money masters,’ or new affluent middle class] who is making shoes there. By renting out the building, the authorities can also make ‘a little extra’, which is a nice benefit for them,” a source in South Pyongan Province reported to Daily NK on October 27.

“‘A little extra’ refers to profits falling outside of enterprise work quotas utilizing state labor and raw materials.”

An additional source in the same province corroborated this news.

She added that the officials in charge of the factory must first make sure that they will be able to sell enough of the extra goods manufactured by the donju on the market to make it worth their while. If they calculate that it will be a profitable good to sell, they go ahead and agree to rent out part of the factory warehouse.

Winter is, without fail, a busy season for shoe markets in North Korea. Demand explodes for cotton wool and fur shoes to prevent frostbite. North Koreans put cotton wool into black or army green cloth to make shoes known as “Tong (a mispronunciation of the word Chinese-derived word in Korean meaning ‘winter’) Shoes”. Fur shoes are boots made of synthetic leather and stuffed with compressed cotton wool or sheep wool.

As North Korea’s primary shoe factories, “Pyongyang Shoe Factory” and “Sinuiju Shoe Factory” receive a quota for the number of shoes they should produce to distribute seasonally, they cannot adjust their production levels to meet actual market demand. This leaves a hole in the market the donju are keen to step in and fill.

What really determines the quality of wool or fur shoes is the sole. The donju buy rubber in the general markets and hire laborers to construct soles from it in, as might be expected, exceedingly unsafe work environments. With no access to safety masks, let alone other protective gear, workers inhale overwhelming quantities of noxious gases in the process.

Nonetheless, workers eager to do the job are never in short supply– those hired for the task are paid who wages 2-3 times that of typical day laborers working for the donju.

Although it is possible to sew the leather outer parts and midsoles of shoes at home, proper equipment is required to produce quality insoles. Rubber is pulverized, reconstituted using a machine, and then mixed with fresh rubber to fabricate insoles. However, a compressor is needed to complete this task, which is where the factories come in.

These days, although it is possible to earn a fair amount of money producing goods at home, “if you’re more ambitious and want to enter into large-scale production you’ll run into an electricity supply problem,” the source noted.

“While it can be said that utilizing the unused space of factories contributes to national production, in the end it’s really the factory’s supply of electricity that proves to be the lure.”

In fact, the first thing donju check when scouting a factory to approach is that the facility has a stable power supply. If all on this front checks out, the donju seek out the cadres in charge and set up a contract stipulating that said entrepreneur pay 30% of his or her profits from the sale of goods produced in the factory as rent.

The factories involved in these deals are typically those associated with the coal mining industry. These enterprises produce the majority of the equipment used in North Korea’s coal mines, and because iron is the most used raw material in the production of the related equipment, such factories receive a larger allotment of electricity than typical light industry factories.

There are, of course, other types of factories receiving steady streams of electricity, but for the time being, they are off limits, according to the source. By way of example, the source explained that because munitions factories harbor a litany of “national secrets, ordinary citizens cannot access them no matter how much money they spend.”

And yet, the fact that North Korea’s donju are now turning their focus towards the production of consumer goods can be interpreted as yet another sign of North Korea’s ever-expanding marketization.

She analyzed these trends as follows: (1) as the relative purchasing power of North Korea increases, demand is increasing as well; (2) markets are developing within North Korea, and state-operated stores are also being rented out and run as de facto private operations; (3), the number of retail outlets selling consumer goods is skyrocketing; (4) the use of ‘servi-cha’ has especially improved the distribution process; and (5) compared to goods directly imported from China, the price competitiveness of local goods has improved as well.

In the past, North Korea’s foreign-currency earning enterprises or the donju would go to Zhejiang Province in China or other regions with low labor costs and import large quantities of consumer goods at low prices to distribute within North Korea.

However, these cheap goods fall short of satisfying the market preferences of North Korean citizens today, the source concluded.

Read the full story here:
As factories rent out space, donju move in and set up shop
Daily NK
Seol Song Ah
2015-11-2