Poor Professors, State Corruption, and the Entrepreneurial Spirit Within the North Korean Economy

By | August 23, 2012 | No Comments

Kim Heung-kwang speaking at ASAN, June 21, 2012 | Via NKNews and Matthew McGrath

The ASAN Institute for Policy Studies in Seoul is a prolific generator of events and analysis about the situation on the Korean peninsula.  Fortunately, our SinoNK team in the South Korean capital endeavors not just to keep up with, but to contribute to these activities.  Analyst Brian Gleason arrives with some tales from the North, and drives forward with writing on the unequal distribution of resources, corruption, and entrepreneurship in the DPRK. — Adam Cathcart, Editor-in-Chief

Poor Professors, State Corruption and the Entrepreneurial Spirit Within the North Korean Economy

by Brian Gleason

Following up on SinoNK’s previous coverage of North Korean resettlement issues at Asan’s 2012 North Korea Week, this post looks at lectures delivered by Lim Soo Ho from the Samsung Economic Research Institute, and Kim Heung Kwang, a former professor in North Korea and current head of North Korea Intellectual Solidarity. Each speaker discussed state corruption, the growth of free enterprise and the entrepreneurial spirit developing within the North Korean economy.

“A Window for North Korea’s Economy: Markets” |  Lim Soo Ho’s lecture initially focused on the link between the inactivity in North Korea’s state-run factories and the subsequent development of small-scale market activity throughout the country. Initially, small-scale market activity was actually encouraged by Kim Jong Il via the August 3, 1984 announcement of the “People’s Consumer Goods Production Movement,” which allowed people to produce consumer goods such as small handicrafts locally without state control or supervision. This quickly led to the advent of the so-called “August 3rd Person,” which refers to a North Korean worker “who contributes a designated amount that far exceeds his or her wages to the company; the person then proceeds with private commerce.”[1] This was initially limited to the few people with enough capital and connections to be sanctioned as an August 3rd Person, but as the economy began to deteriorate, more and more workers began to generate income outside of the centrally planned system: often illegally.

During the mid-late 1990s economic crisis, the factory operation rate plummeted to 20-30%, prompting many workers to steal supplies from the state-run factories in order to make their own handicrafts and other goods to support themselves. Since the Public Distribution System was also failing to provide for the people, these workers often felt compelled to provide for their own families with whatever materials they could find, including goods stolen from the state used for private production.  Lim notes that this increased private production was in essence a form of capitalism that utilized outsourcing, wholesalers and retailers, which in turn created more and more privately wealthy individuals.

The Rising Impact of Wealthy Individuals  | Initially, many of these independently wealthy individuals opted to act as loan sharks, charging a usurious 20-30% interest rate to other North Koreans looking to start private operations for themselves. Around the turn of the century, however, these individuals began to use the money to invest in North Korean icompanies and factories. Aspiring factory owners borrowed money from the wealthy in order to start their own operations; in turn, these rich creditors not only collected interest on their loans, they also reaped profits from the distribution of the final products from the factories.

According to Lim, the North Korean authorities have consistently tried to get rid of these privately wealthy individuals, but have consistently failed. Lim also doubts that the attempts to root out the privately affluent are earnest because the authorities generally depend on bribes to maintain their own lifestyles. Thus, he reveals that there is in fact some level of complicity between the authorities and the privately wealthy, and a prime example of this complicity can be observed in the housing market.

When the North Korean government began to establish massive housing units, wealthy North Korean individuals, as well as Chinese investors, were allowed to invest in these projects. With a maximum investment limit of KPW 500,000 (USD3,852.03),[2] the Chinese usually supply bricks, cement and other machinery while the North Korean investors help supply other equipment and materials. Although apartment ownership is technically illegal in North Korea, this is actually condoned by the North Korean authorities, who profit handsomely from the deals.

A North Korean People’s Army soldier near Kaechon gestures at goods which his unit has generously decided to donate to flood victims. KCNA, naturally, is there to report this somewhat rare transfer of resources from Army to people. | Via Korean Central TV

Lim’s Take on Rice Prices and Food Shortages | During the mid-late 1990s the food shortages in North Korea were dire, but Lim claims that since 2006, the food shortages have been even worse than they were back in the 1990s. Nevertheless, he maintains that fewer people are dying of hunger now than they were back then, and the private market is a big part of the explanation. When the Public Distribution System collapsed in the 1990s, many North Koreans were steadfast in their belief that the state would eventually come through and provide adequate rations until the hard times passed. Due to this strong socialist mindset, many faithful North Koreans waited in vain for the state to deliver, and even when their survival instincts ultimately overrode their ideological inclinations, most lacked the resources or organizational capacity to provide for themselves. Tragically, around 2 million North Koreans are believed to have perished during the famine, and many more were pushed to the brink of starvation.

Since then, in yet another example of increasing private enterprise, North Koreans have started producing and distributing their own food in the free market. Although this is technically illegal, Lim asserts that it has saved countless lives, and with unpredictable weather and increasing food prices, it could not have come at a better time. The average salary in North Korea is currently about KPW2,000 (USD15.41), yet a kilogram of rice costs KPW4,000 (USD30.82). Thus, for many North Koreans, the free market is not an entrepreneurial instinct; it is merely a survival mechanism.

Eyewitness Testimony: “North Korea’s Domestic Situation in 2012” |  Former North Korean professor Kim Heung Kwang corroborated the dismal wage-food price ratio in North Korea by explaining that even as a computer science professor, he could only afford 1 kg of rice each month on hisKPW 4,400 monthly salary. He added that since the average laborer only earned about KPW 2,200 when he left North Korea in 2003, almost everyone engaged in free market activity either to augment their wealth or simply to make ends meet. Professor Kim even felt compelled to enter into business for himself; since he emphasized that North Korean professors are not paid enough money to live comfortably, he spent a lot of his free time creating a mosquito repelling device that he sold in the marketplace.

Kim’s enterprising mentality apparently rubbed off on his sister. After he moved to South Korea, he sent her enough money to buy food and other necessities for a few months, but soon after she contacted him again asking for more money. When the stunned professor asked her how she had spent the money so quickly, she explained that she had gone to a sauna and enjoyed herself so much that she decidedto transform a room in her home into her own private sauna using firewood and other locally available materials. She then quietly advertised the makeshift sauna, and as word spread, it became a popular destination for people to take a steam shower or a hot bath for a small fee. Unfortunately, once the authorities caught wind of the operation, they immediately shut it down and seized her earnings. Nevertheless, undaunted by her brush with the law, Kim’s sister has asked him for yet more money to start a restaurant equipped with a massage parlor. Although the idea elicited a big laugh from the speaker, he emphasized that many North Koreans today are thinking about money and free enterprise in a way that would have been unimaginable just a generation ago.

[1] Un-Chul Yang, Downfall of the North Korean State Economy: Losing Political Authority and Gaining Military Frailty, International Journal of Korean Studies, Vol. XVI No. 1, Spring 2012.

[2] KPW refers to the North Korean won. All currency conversions are based on current exchange rate data.