The Siren Call of Deng: Following in China’s Footsteps?

By | November 23, 2015 | No Comments

Kim Jong-un drags Pyongyang into the future on a new mass transit line. | Image: Rodong Sinmun

Kim Jong-un heads out on a ride into the future with a group of Cabinet officials as they test a brand new section of underground mass transit in Pyongyang. But is existing economic policy enough to drag the wider economy along for the ride? | Image: Rodong Sinmun

There is wisdom in comparative historical analysis, but it demands careful attention to three things: timing, sequence, and context. When, how, and under what conditions something happens tells us how similar (or dissimilar) phenomenon stretched across time and space really are.

Take, for example, economic reforms in North Korea. Current economic reform efforts, namely the June 28th measures in 2012 and the May 30th measures in 2014, may strike some as somewhat similar to “Chinese style” reforms during the early Deng Xiaoping years (1978-1984). But such a comparison does not stand the test of close analytical scrutiny, argues Kevin Gray, Senior Lecturer in International Relations at the University of Sussex. Drawing on his recently published article in The Pacific Review, Gray examines the timing, the sequence, and the context (especially the geopolitical context) of recent reforms in North Korea to show that, although similar in form, these reforms will not bring Chinese-like results. — Steven Denney, Managing Editor

The Siren Call of Deng: Following in China’s Footsteps?

by Kevin Gray

For many years, one of the key questions addressed by North Korea analysts has been why the country has failed to adopt Chinese style reforms. In answering this question, attention is frequently paid to the regime’s requirements of ideological continuity in the context of its system of hereditary succession.

However, since coming to power in 2012, the Kim Jong-un government has reportedly initiated some bold attempts at reforming the economy through the restructuring of the country’s collective farms and state-owned enterprises (SOEs). The much discussed “June 28th” measures of 2012 and “May 30th” measures of 2014 are designed to overcome longstanding problems of inefficiency and poor incentives through increasing the scope for material rewards.

Incentives: Farms & Enterprises Get a Lift | In agriculture, this has meant a reduction in the size of sub-work teams to what is effectively a family-based production unit, known as the Field Responsibility System. In contrast to past arrangements whereby the state procured a fixed amount of the harvest, the new system reportedly allows for 60 percent of the harvest to be retained by the production unit (i.e., the family) to be disposed of as it sees fit, including through sale in private markets.

The measures have similarly sought to raise the efficiency of the SOE sector through introducing greater managerial decision making powers with regards to production, the recruitment of workers, and the setting of wages. As such, the reforms represent the state’s recognition of the already significant degree of marketization taking place within the North Korean economy as well as an attempt to deepen those market imperatives for the purposes of raising overall efficiency.

The extent to which these reforms have been put into practice is unclear. What is clear, however, is that they are influenced by Deng Xiaoping’s reforms of the late 1970s and early 1980s. One group of South Korean researchers has thus suggested that improving farmers’ incentives alone is likely to lead to a 7.5 percent GDP growth rate, and that is without considering the impact of growth in agriculture upon other sectors. Indeed, the fact that in 2014 North Korea experienced its best harvest since the mid-1990s may at least in part be a testament to the effectiveness of the agricultural reforms, though there is little evidence yet as to the impact of the SOE reforms.

Nonetheless, as I have argued in a recently co-authored paper with Jong-Woon Lee of Far East University, there are important reasons why Pyongyang’s attempts to emulate the Chinese experience are unlikely to produce the same spectacular results seen in China.

Weather permitting, North Korea's agricultural production is likely to rise, But it isn't going to bring a brave new dawn. | Image: KCNA

Weather permitting, North Korean agricultural production is likely to rise with or without Kimist on-site guidance. But it isn’t capable of bringing a brave new dawn. | Image: KCNA

Industrial Agriculture: In the Dock | While the problem of incentives in North Korean agriculture are real enough, they can hardly explain the decline in food production in the 1990s.  At least part of the story of that decline is the highly industrialized model of agricultural production that emerged in North Korea, as manifest in the high levels of fertilizer utilization. As such, the end of subsidies from the USSR and China in the early 1990s and the ensuing energy crisis had a highly damaging impact on production levels, leading to the famine. The recovery of North Korea agriculture thus continues to be hampered by North Korea’s ongoing energy problems.

Increased incentives may have some positive impact, but the situation in North Korea seems a world away from the gains in food production made in China, many of which were based on prior improvements in productivity as a result of the adoption of new technologies in the 1970s.

The success of North Korea’s SOE reforms is more difficult to judge. It is important to note, however, that SOE reform in China was far from a success story. Indeed, the part of China that most resembles North Korea’s failing SOE-centered economy is the struggling northeast, which has fallen behind the more dynamic coastal provinces. China’s dynamism following Deng Xiaoping’s reforms came not from the state-owned sector but from the emerging ‘second economy’ in the form of the rise of the getihu (个体户; small ‘private’ businesses) and the town and village enterprises (乡镇企业; TVEs).

There are indeed parallels between the getihu and the North Korean donju  (돈주; money masters) Both have adopted a strategy of “wearing a red cap,” namely running what are in reality private firms whilst maintaining a de jure SOE status. It should be noted, however, that a large proportion of North Korea’s donju are engaged in the service economy rather than manufacturing. As an expression of North Korea’s dependency vis-à-vis the Chinese economy, they are often involved in selling China-sourced products in North Korean markets.

In terms of TVEs, however, there is a further reason why North Korea’s adaptation of the Chinese model is unlikely to bring similar results. TVEs were established out of  the formal de-collectivization of agriculture in the early 1980s. However, a key feature of the North Korean system is that despite the adoption of the Field Responsibility System, the collective farms themselves have not (yet) been dissolved.

Kim Jong-il meets Deng Xiaoping, Beijing, 1983; image via Chosun Central TV

Kim Jong-il meets Deng Xiaoping, Beijing, 1983. | Image: Chosun Central TV

Muddling Through: Special Economic Zones | More importantly, China was largely an agrarian society at the time of the onset of economic reform, and as a result, was able to allow the growth of a sizable “second economy” outside of the state-planned sector. Politically, therefore, market reforms were easier to achieve as they did not impinge upon vested interests. Improvements in agricultural productivity released labor from the land, thereby underpinning the growth of the coastal industries. Given North Korea’s already high rate of industrialization and urbanization, there is no such surplus of labour in the countryside waiting to be released into industry.

Attracting foreign investment through the establishment of enclave special economic zones is an alternative way in which North Korea can revitalize its industrial base. Indeed, the Pyongyang government has been enthusiastic with regards to establishing such zones. However, given the fact that North Korea’s geopolitical environment is far more adverse than that enjoyed by China as it embarked upon its reforms, it would be naive to believe that North Korea could reproduce a Shenzhen-style economic success story.

None of this is to suggest that Pyongyang’s reform program will not bring some improvements to agricultural and industrial efficiency. However, it is important not to assume that Chinese-style policies will necessarily bring Chinese-style results.