Sino-NK

“Let’s live in our own way!” True to its word, over the last 20 years North Korea has unwillingly adopted a hybrid economy that defies ready categorization. | Image: Christopher Green

Thankfully, much of the world has caught on to the incontrovertible fact that North Korea is not a communist state, if indeed it ever was. Conversely, however, Pyongyang is doing a rather better job of fostering the illusion that it still operates along command economic lines.

However, the time has come to overturn that misconception, too. As shown in a number of Sino-NK essays and commentaries, what North Korea really has is an economy in which some areas operate in an ad hoc capitalist fashion, but with a complete and utter lack of those institutions and practices that allow other capitalist economies to function effectively: ways of moving information at high speed to where it is most needed, state taxation for the purposes of redistribution and infrastructure development, logistics networks for the free and rapid movement of people and goods, and frameworks for legal redress, etc. The result, perhaps predictably, is unsatisfying to all, and profoundly unhelpful for the ordinary North Korean people.

In his latest piece for Sino-NK, Professor Andrei Lankov reveals more about North Korea’s quixotic brand of “state capitalism.”- Christopher Green, Co-editor

The Limits to Marketization: State and Private in Kimist North Korea

by Andrei Lankov

Stalinist Smokescreen: the Fall of the Command Economy and Rise of the Market | North Korea is frequently described as the last Stalinist state. As a matter of fact, its government works hard to create that impression. Coming to Pyongyang, a tourist is surrounded by Stalinist paraphernalia. More significantly, pretty much all of the economy seems to be state-run—as one would expect in a Stalinist regime. If you were to ask your North Korean minders, they would be sure to tell you that not only shops and restaurants, but also inter-city buses and factories, are managed by the omniscient and omnibenevolent state bureaucracy, whose members surely know how to allocate and distribute production in the most efficient and humane way.

However, such claims have become increasingly misleading. North Korea over the past twenty years has not merely experienced a remarkable growth in private markets, but has also seen the once clear-cut line between state and market blurred to the point of non-existence.

There are some industries which, for all practical purposes, have been privatized in North Korea for the last two decades. The restaurant industry is an eminent example. It also shows that privatization from the bottom-up is underway. Contrary to what one may believe, Pyongyang has a booming restaurant scene. Most of these fashionable restaurants are actually privately owned. Often a private individual contacts a state agency and suggests that it might be nice to open a restaurant. Officially, such a business is part of the agency in question, but this is a fiction. The private investor buys the necessary equipment and furniture, arranges the interior design, and hires the personnel. Employees are paid salaries well in excess of the usual meager levels—salaries sufficient to make a living. The investor might manage the venture itself, or they may instead hire a full-time manager—the latter being more common when the investor has multiple businesses. Full-time managers are usually given a high degree of autonomy over daily operations.

The government, in exchange for allowing such businesses to operate, expects significant payoffs. It seems that the going rate is between 30-70 percent of net profits. Of course this creates an incentive for creative accounting; thus, the actual share is surely significantly lower. Some of the profit paid to the state is pocketed by state bureaucrats, but much of it seemingly ends up in the state budget itself.

Another fine JVC we’ve gotten ourselves into. | Image: KCNA

A “Bizarre” Relationship: State-Private Enterprises in North Korea | It is interesting that North Koreans themselves appear to be at a loss when it comes to defining these ventures. When confronted with the question of whether the restaurant described above is a private or state enterprise, many give a nonsensical answer, calling it “a state-owned restaurant with a private investor.” This type of bizarre property relations (essentially private property described as state-owned) is remarkably common in North Korea today. For example, many shops are run by private merchants but are registered as state outlets. The owner pays sales clerks, makes sure that the shop is stocked, and makes all managerial decisions. As with restaurants, a significant portion of earnings are supposed to go to the state.

Another area where private capital is common is inter-city transportation. Marketization in North Korea over the last two decades has necessitated the development of cargo and passenger transportation. Many of the old cars that navigate the poorly paved or unpaved roads of North Korea are usually owned by investors in the North. These investors usually buy old vehicles in China and register them with a North Korean government agency. Depending on the agency and the vehicle, costs of registering vary. It costs more to register your vehicle with a more powerful agency, for example.

In some cases, private capital can play a role in more advanced areas, such as mining. I personally know a North Korean who used to run a small gold mine. He bought equipment second-hand from state mines not in operation, hired experienced, skilled labour, and then restarted an old mine. Ostensibly this was all to be part of a foreign currency-earning operation directly managed by the party itself. In practice though, the enterprise followed the aforementioned pattern. The investor/manager, having sent some money to the relevant party agency, as well as some bribes to his supervisors, was free to use the remaining profits as he saw fit.

Generally, foreign currency-earning operations provide good cover for a fusion of state-private enterprises. Unlike most communist countries, North Korea has never had a centralized foreign trade system. Since the 1970s, many government agencies, as well as state enterprises, were given the right to establish their own foreign trade branches. These branches were supposed to sell the goods and products of the organization they were connected to, but things were rarely so simple. Many of the operations were connected to non-economic units, like a local party branch or army unit. To compensate, these organizations were often given a monopoly on locally produced commodities like mushrooms or squid.

However, in order to make sure that the commodities were collected, the relevant agency had to be able to pay producers or gatherers—and by the early 1990s few North Koreans were willing to work for free. This is where private investors came into play. They often made (and continue to make) deals with the foreign currency-earning branches of relevant agencies and then invest the necessary money to buy the commodity. They also use their connections to arrange for logistics: transportation, storage, and sometimes export to China (North Korea’s almost exclusive, sometimes reluctant foreign trading partner). After a fixed amount is paid to their superiors (partially as a bribe and partially as a contribution to the budget) the rest is reserved for the investor as their income.

A New Model: North Korea’s Dual Economy | The system described above is relatively unusual, and has few precedents in the state socialist world—perhaps the closest approximation would be that of Soviet Central Asia in the 1970s, where a significant part of the service industry and small industry was run by private investors who also contributed to the state budget and provided the necessary kick-backs. However the scale of private investment in Central Asia was well below that in North Korea today.

Such a system is essentially a market economy, of course, but unlike the de facto market economy of 1980s China, it is probably unable to generate significant economic growth. It does not help that many of the enterprises described above remain illegal; their owners thus have virtually no legal protection.

Another problem is the lack of infrastructure necessary for stable growth. Even the exchange of basic information is rather complicated in North Korea—in spite of significant progress brought about by the recent and rapid spread of mobile phones. The government itself does not know what to do about these developments. They are afraid of the uncontrolled growth of private entrepreneurialism, and they do what they can to keep these developments at bay. It is telling that in March this year Kim Jong-un delivered a speech about the situation in light industry. In the speech, he admitted that the state of the industry was dire, but also said that the continuing leakage of products and raw materials was one of the main reasons for the ongoing crisis.

In sum, North Korean private business is in a peculiar situation. It makes a significant contribution towards the survival (and even the modest growth) of the North Korean economy. However, due to government suppression and the absence of property rights, it is unlikely to ever produce the economic breakthrough that North Korean desperately needs.

Further Readings

Daily NK, Border Cities Love Chinese Yuan, Daily NK, April 17, 2013. (Or via Facebook.)

Christopher Green, Barriers to Entry: Cellular Telephony in the Digital DPRK, Sino-NK, November 25, 2012.

Christopher Green, In Mao we trust: the increasing use of Yuan in North Korea, NK News Pro, May 14, 2013.

Christopher Green, Yuanization Writ Large: Daily NK Confirms the Rush to RMB, Sino-NK, April 19, 2013.

Jang Jin-sung, The Market Shall Set North Korea Free, New York Times, April 26, 2013.

Andrei Lankov and Kim Seok-hyang, “North Korean Market Vendors: The Rise of Grassroots Capitalists in a Post-Stalinist Society,” Pacific Affairs 81, no. 1.

New Focus, A Rising Trend in the North Korean “Financial Industry,” New Focus International, June 5, 2013.