Posts Tagged ‘Kim Jong-un’

A crackdown on the North Korean market economy?

Tuesday, December 1st, 2020

By: Benjamin Katzeff Silberstein

(This is a rather long post with two parts: the first analyzes some recent events suggesting a government crackdown against the market economy, while the second recaps the some recent events within this trend. For readers interested primarily in the latter, I suggest scrolling down to the subheading “The events: a brief recap” below.)

Is the North Korean government cracking down on the market economy as such?

I would argue that we are not quite there yet, but an ever-increasing number of news seem to be suggesting that economic policy may be going in this direction. It’s also entirely possible that there is in fact no coherent strategy. One should not overestimate governments in general when it comes to coherence – this is nothing unique to North Korea. Nonetheless, these developments are crucial to keep a close eye on.

This post goes through some of the most central developments over the past few weeks below, but in short, some of these events are:

  • the general rhetoric and personnel politics from Kim Jong-un over the past year or so, repeated statements from high official organs about the need for economic control (most recently in a politburo meeting on November 30th),
  • the crackdown on foreign currency use and the reported execution of a foreign currency trader,
  • a reported change in the management of general markets to greater centralization and direct state control,
  • and last but not least (for now), an amendment to the enterprise law, effectively placing a common form of private enterprise under state scrutiny and administration.

This list is by no means exhaustive. For example, North Korean academic journals, often good proxies for what’s cooking in the policy circles, have repeatedly emphasized the need to “create an administrative system” since late last year. In North Korean parlance, this is likely code for increased state oversight and control. (Hat-tip to my good friend and colleague Peter Ward, perhaps the most thorough and dedicated researcher of North Korean journals in the analyst community.)

As I write more about in a forthcoming article for 38 North, the state has placed a high priority on reigning in – and at the very least, governing and administering – the market economy for some time, and with heightened intensity since the 2019 December plenum in particular.

There may, however, be more to it. There still is not sufficient evidence to conclude that the state is actively trying to stomp out markets or market mechanisms as such, but it is a possibility.

First, a basic question: if there is a general crackdown going on against the market economy, what would be the purpose? Again, no one knows, but one can speculate about a few different possibilities.

Perhaps most basically, North Korea is still, at least nominally and theoretically, a communist state with a centrally planned economy. Legally, private property does not exist. There has yet never been an official, explicit, major break with this model. We have often taken the state’s reluctance to crack down on the markets, and indeed, its occasional embrace of market mechanisms, as tacit acceptance that they are in the North Korean economy to stay. Maybe this assumption was wrong all along, or maybe things have changed over the past couple of years.

On the same theme, let’s not forget that North Korea’s political and social system is highly totalitarian. It is only natural that it would tend towards greater control, ultimately aiming to either eradicate or (more likely) tame groups such as the donju and integrate them into the official system. Economic reform and liberalization will always be potentially threatening, as they expand a sphere beyond state control, whether it be in the economy or society overall. Perhaps the North Korean leadership thinks the limit has been reached and it is time for a general rollback.

There may also be a pragmatic purpose to it all. As I have argued before, growing resource scarcity is a likely driver for increased economic control by the state. This is perhaps the most charitable and optimistic reading, as it suggests that the trend may one day be reversed.

Whatever the case, this is all troubling. The state and Kim Jong-un personally may very well be overestimating the capacity and potential of the state economy as an alternative to the market sphere. North Korea is a state with relatively capable governance in some areas, but with a very low capacity in others. Quite likely, the state simply has little grasp of the size of economic activity, and little overview of what this activity consists of. (See, for example, this recent report by Daily NK about a general survey of firms and enterprises leading up to the Party Congress in January 2021.) The border closure due to Covid-19, among other examples, shows that the state is prepared to accept a high degree of suffering among the general public for the purpose of social stability.

The events: a brief recap

The latest data point came a couple of days ago, at the latest of a staggering eleven politburo meetings this year. The KCNA summary contains two highly concerning paragraphs (my emphasis):

”The meeting discussed and studied as key agenda items the issue of hearing a report on the preparations for the 8th Congress of the WPK and taking corresponding measures, the issue of reorganizing a relevant department mechanism of the Party Central Committee to strengthen the field of the Party ideological work, to more thoroughly establish the Party’s leadership system in relevant institutions and to intensify policy guidance and Party guidance over them and important issues of improving the Party guidance over economic work and carrying out immediate economic tasks. Then decisions were made on them.”

And:

”The Political Bureau of the Central Committee of the WPK harshly criticized the economic guidance organs for failing to provide scientific guidance to fields under their charge under the subjective and objective environment and the prevailing conditions, and for failing to overcome subjectivism and formalism in their work. It stressed the need to put the operation and command for carrying out the Party’s economic policies on a scientific basis and display great dedication and responsibility.”

 

(Source: “Enlarged Meeting of 21st Political Bureau of 7th Central Committee of WPK Held,” Korean Central News Agency, November 30th, 2020.)

This comes against the backdrop of several similar statements from the politburo and other organs through the year and, not least, worrying measures, such as the reported execution of a foreign currency (among other measures) trader amid a strange appreciation of the won against the US dollar. Maeil Kyungje:  

“코로나19 확산에 위기감이 높아진 김정은 북한 국무위원장이 `비합리적 대응`을 하고 있는 것으로 보고됐다. 방역 위기에 경제적 어려움이 겹친 상황에서 환율 급락을 이유로 평양의 환전상을 처형하고 바다에서 어로와 소금 생산을 금지하는 등 무리한 조치를 취하고 있다는 것이다.

국회 정보위원들은 27일 국가정보원에서 최근 북한 동향을 이같이 보고받았다고 밝혔다. 정보위 야당 측 간사인 하태경 국민의힘 의원은 “김 위원장이 과잉 분노를 표출하고 있으며 상식적이지 않은 조치를 내놓고 있다”고 평가했다. 이날 국정원 보고에 따르면 김 위원장은 지난 10월 말 `평양의 거물 환전상`을 처형했다. 북한 내 환율이 최근 들어 급락했는데 이에 대한 책임을 물어 비공개 처형했다는 것. 북한은 외화난이 상시화했지만 국경 봉쇄로 외화 수요가 줄어 환율이 급락한 것으로 보인다. 하 의원은 또 “바닷물이 코로나19로 오염되는 것에 대한 우려 때문에 (김 위원장이) 어로와 소금 생산을 금지했다”고 말했다.”

(Source: Park Jae-wan, “Kim Jong-un executes foreign currency trader amid plunge in exchange rate,” Maeil Kyungje, November 27th, 2020.) See this Financial Times article for an English-language summary of events.

And then there’s the recent sudden appreciation of the won. Bill Brown explains this well here. It is, however, part of a broader push for people to use less foreign currency. There could be a whole host of reasons for this move, one of which could be to drive more of it out of circulation and into state hands. We still know too little to draw any firm conclusions.

Daily NK also reported a couple of weeks ago about new measures to centralize control over general markets under Party control. The report did not suggest direct measures to curtail market activity per se, but this may well be the consequence should the measure be fully implemented, with more red tape and central management further from the ground.

North Korea’s KCNA recently ran an article about two bills adopted by the Supreme People’s Assembly. One of them — a ban on smoking in certain areas — got quite a bit of attention, which lighter news from North Korea often does. The second one — an amendment to the country’s enterprise law — is, however, potentially much more significant, and could significantly curtail and hamper private business activity in the country. Here is what KCNA (5/11/2020) said about it:

”The amendments and supplements to the enterprise law newly point out such matters as of turning enterprises into labour-, energy-, cost-, and land-saving ones and making their employees patriotic working people who possess the spirit of economy as part of their mental qualities.

They also refer to the regulations which all the units must observe when organizing new enterprises or when changing their affiliations and those designed to ensure that production and business management are done on socialist principles under the unified guidance and strategic control of the state.”

Now, these few sentences reveal relatively little about what this could all mean in practice. Daily NK reported a few days later, however, that the government aims to centralize control of small business usually operating illegally, known as “kiji”, under official SOE frameworks. Corruption is certainly problematic in general, but given the fact that a massive proportion (or most) of private business in North Korea operates under frameworks that are technically corrupt, the ambition to strengthen government oversight may have serious adverse consequences. (For more on the “kiji” system, see this excellent journal article.)

In conclusion, it is too early to tell what the regime’s end goal is with these measures. At the very least, we can conclude that the state aims to lay more of the economy under its control and management. That is of course a central end goal in itself.

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The economic side of the Moon-Kim summit

Friday, September 21st, 2018

By Benjamin Katzeff Silberstein

The economic aspect has been continuously front-and-center throughout the Moon-Kim summit in Pyongyang (September 19–20). From a diplomatic standpoint, this is not all that surprising. Moon and Kim are pursuing what appears to be a rather classical Sunshine 2.0 pattern, with roughly the same contents as the predecessor. As Yonhap reports:

Earlier in the day, the leaders of South and North Korea agreed to work together for balanced economic development on the Korean Peninsula.

South Korean President Moon Jae-in and North Korean leader Kim Jong-un agreed to break ground on a joint project to connect railways and roads across their border this year and vowed diverse cooperative projects to deepen their friendly ties and foster a reconciliatory mood.

The agreements were reached during summit talks held in Pyongyang between Moon and Kim.

“We will prepare for (inter-Korean economic cooperation) in a calm and orderly manner,” Finance Minister Kim Dong-yeon said in a meeting with reporters here.

“But inter-Korean economic projects can gather speed if circumstances improve,” he said.

The minister said any inter-Korean economic projects should need support from the international community, and there are still many things to be done in advance.

The latest agreement came months after the leaders reached a deal during their April summit to modernize and eventually connect rail and road systems across their divided border.

Field surveys have been carried out to examine the state of some sections of the North’s rail and road networks, but the process has not moved fast enough, apparently due to stringent sanctions imposed on the North for its nuclear program.

Railways and infrastructure are both less politically touchy than outright trade, and potentially mutually beneficial, even though the south will carry the economic burden:

“The South and the North agreed to explore practical measures aimed at increasing exchange and cooperation and seeking balanced development,” read a joint statement they signed after the summit.

“The two agreed to hold a ground-breaking ceremony this year for connecting railways and roads running along their eastern and western coasts,” it also stated.

The decision came months after the leaders reached a deal during their April summit to modernize and eventually connect rail and road systems across their divided border. The Seoul government has set aside nearly 300 billion won for next year to carry out those projects.

Field surveys have been carried out to examine the state of some sections of the North’s rail and road networks, but the process has not been fast enough, apparently because of global sanctions on the North.

The second point of the Pyongyang Declaration promises more economic cooperation for “balanced” growth, and vows to reopen projects such as the Kumgangsan tourism zone, and the Kaesong Industrial Park, according to Moon, “when conditions allow“. Here’s an English-language full-text version of the declaration. A particularly interesting but understudied point is 2.3, on ecological cooperation.

Kim Jong-un’s forestry interest has been a recurring theme throughout his tenure, and as this blog has covered, he’s spoken about the problems associated with excessive tree-felling – the root cause of which is North Korea’s planning failures of the 1990s – in more honest terms than his father did. At the very least, there’s been strong hints of both pragmatism and understanding of North Korea’s structural problems in the way that Kim has talked about the forestry issue (and many others too for that matter). Indeed, the Korea Forest Service chief accompanied Moon to Pyongyang, and he hopes to get to work soon following the summit:

“Forests surrounding populous urban areas were heavily destroyed, but forests in less populated regions were well-preserved,” Kim Jae-hyun said in a meeting with reporters at a government complex in Daejeon. “I saw enough hope.”

He was speaking after accompanying South Korean President Moon Jae-in’s visit to North Korea from Tuesday to Thursday.

As the first step, Kim said the Korea Forest Service will explore ways to create tree nurseries in much-destroyed regions.

“The North Korean side wants large-scale tree nurseries, but it would be more practical to start with small nurseries in regions suffering from deforestation the most,” he said.

In regard to disease and insect control efforts, the official said the use of machinery could be limited as the North is under U.N. sanctions for its missile and nuclear tests, while pesticides are allowed.

“I think (the disease and insect control measures) should start immediately to build trust between the two Koreas,” he said.

The forest expert said his North Korea visit as part of the official entourage showed Moon’s “willingness” to pursue inter-Korean cooperation in the forest sector.

“Looking down from an airplane along the western coastline, North Korea’s forests were very impressive,” Kim said. “There were few trees on hills near Pyongyang, while trees were well-maintained on the way from Sunan Airport to Baekhwawon guesthouse.”

Mountains near Yalu River on the North Korean border with China were denuded, but Mount Paekdu showed off all colors of beautiful trees, he said.

Moon and Kim aren’t the only ones who have talked about economic cooperation. The mayor for Busan, South Korea’s second most populated city, for example, has announced projects that his city will spearhead. Yonhap again:

Busan’s envisioned projects, unveiled in time for President Moon Jae-in’s historic visit to North Korea, call for boosting the city’s cooperation with the North in the fields of fisheries trade and processing, modernization of fishing vessels and equipment, shipbuilding, exhibitions and conventions and smart city technology, the city said.

The city will push to invite North Korean filmmakers and actors to the Busan International Film Festival and hold an inter-Korean film festival.

Nikkei Asian Review also reports that the Moon government has put pressure on Samsung and its head, Lee Jae-yong, to present a large-scale investment plan for North Korea. Samsung has manufactured TV:s in North Korea before, but this time around, the company hasn’t appeared as eager as its other chaebol-counterparts to draft up implementable blueprints for investments up north. Politically, it makes sense. Samsung’s PR hasn’t exactly been superb as of late, with the arrest and later release from prison of its CEO relating to corruption charges tied to the Choi Soon-sil/Park Geun-hye-scandal.

South Korea’s main steelmaker Posco is also hoping for opportunities following the summit:

The executive was part of the business delegation that accompanied President Moon Jae-in on his trip to North Korea earlier this week. Choi and other businessmen discussed various inter-Korean economic cooperation projects that can be pursued going forward if conditions are right.

“It will be a big opportunity not only for POSCO but for the steel industry as a whole,” Choi said. “I think POSCO will be able to find chances for growth.”

The company recently created a new task force to prepare for potential business opportunities in North Korea. POSCO Daewoo, POSCO Engineering & Construction Co. and POSCO Chemtech Co. are participating in the task force.

The steelmaker said it wants to play a key role in railroad and other infrastructure projects in line with the changes in the geopolitical environment in Northeast Asia.

My five cents on what all this entails for the North Korean economy:

Of course, as of yet, nothing. Most of the plans and visions are routinely accompanied by the caveat “when conditions allow”. The infrastructure plans may be able to go ahead even with sanctions in place, at least the rhetoric from the Moon administration, and the timetable for breaking ground on the railway connections before this year is over, seems to suggest so. I’m no expert on the judicial side of the sanctions, but it’s hard to imagine that this will be fully uncontroversial from that standpoint.

In any case, North Korea is in dire need of infrastructure improvements and if they are extensive enough, they should hopefully not just connect South and North Korea with Russia and China for cheaper freight, but also make domestic goods transportation simpler and more efficient, with positive impacts for the markets and private manufacturing in the country.

On re-opening Kaesong, things are a bit more complicated. In its nature, Kaesong is a manufacturing zone mostly cut off from the rest of North Korea. Sure, the incomes of the workers did enter the North Korean economy, and arguably, the fact that South Korean consumer goods could to some extent enter North Korean markets through Kaesong spurred competition for more high-quality goods on the North Korean market as well. But Kaesong is hardly the only, and perhaps not even the main route through which such products enter the country. These are also pretty weak arguments when you look at the entire economic picture.

The problem with Kaesong isn’t so much what it was/is/will be, but the missed opportunities. The hope with special economic zones tends to be that institutional frameworks that are tried there first can later spill over into the rest of the country. In the case of North Korea, the arrangement made pretty sure that that didn’t happen, at least from what we can tell. Had inputs been sourced from North Korea, that could also have spurred wider economic growth, at least in some regions. In theory, there are lots of opportunities for synergy and cooperation between South Korean companies and smaller North Korean ones, not just the state. If the goal is economic development in North Korea more broadly, and not just economic profit on the southern side and incomes for the north, there are lots of models that carry far greater potential.

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