Sino-NK

How much “currency” do the ruling elites have in North Korea? Unregulated market activites and rent-seeking are curtailing the power and influence of those at the highest levels of government. | Image: Panaxy

Peter Ward, from his vantage point in Seoul and fresh from publishing his incisive review of “Routinizing Charisma” in the Yonsei Journal of International Studies, turns from analyzing the leadership of the “impossible state” to reflecting on its economic system. He posits that both systems may just survive if North Korea seriously addresses its economic woes. Ward proposes that the regime can reconcile the seemingly contradictory concepts of “state rule” and “market economy” by reining in rent-seeking from low- and mid-level bureaucrats and harnessing the power of the markets. – Roger Cavazos, Coordinator

Reining in Rent-Seeking: How North Korea Can Survive

by Peter Ward

North Korea today is a complex patchwork of different economies and different regions. While state media and government flow charts assert a strongly Pyongyang-centered polity, and an image of state control, the fragmentation of the DPRK since the 1990s highlights at every turn a striking diversity. From the frontiers of North Hamgyong province to the unique entity that is Kaesong, one can indeed become a “witness to transformation.”

The place is sewn together by two things economically: a state sector that still makes some tangible things, like bombs and nuclear weapons, as well as some prestige items like steel and a countrywide market economy composed of regional wholesale and consumer markets. These markets range from small up to big, roof-covered buildings that do not look so different to markets seen in most countries in the world. The point though is that there is a national market economy, and a partially (very partially in many cases) separate planned economy—they are not parallel or even roughly equal, but they do co-exist in a recognizable form throughout the Northern Half of the Peninsula. If North Korea is going to survive according to traditional economic models, it must develop, and if it is to develop, it needs to be economically able to do so. Here is why it may be possible for North Korea to develop.

Market in a small village in Onchon County, South Pyongan Province. | Image: Stephanie Kleine-Ahlbrandt, used with permission of the photographer

North Korea today has a clearly recognizable market economy where a vast majority of the people get most of their daily necessities from and through markets. Many in North Korean studies, from Andrei Lankov to Victor Cha, assert that this is dangerous for the regime. This notion is not false, but markets do not necessarily have to be bad for the regime in the long run—so long as the state can resolve some control and access issues with the markets.

The first major issue that has to be resolved is to align central and local incentives to try and find a way to turn people who work in markets—especially the richer elements—into, at worst, neutral supporters and, at best, overt advocates of the regime in Pyongyang. This can best be done by doing what is happening now: getting officials and secret policemen to marry successful market traders and/or their daughters and sons. Thus the line between the two elites—political and economic—has begun to blur. This could actually be very positive for the regime’s survival prospects: successful black market operators and entrepreneurs are, if they marry into the political elite, liable to become stakeholders in the existing political system. This will also make economic reform politically much less dangerous, because the people who stand to gain most are people who are becoming more connected with the regime.

Alas, regulatory capture—i.e., when industry and governmental regulators work together for the good of the industry—is not a new thing, nor merely a problem for developing countries. Cozy relations between state and private business are common the world over. Institutional reforms, too, will become less pressing. Some of the most successful elements within the market economy are those involved in quasi-state trading companies, many of these individuals gain much through their personal and professional connections to the state. They also have much to lose in the event of either state collapse, or the end of the corrupt practices that enable them to have the investment opportunities they currently have.

The creation of a market-oriented North Korean elite has already begun, and is likely to continue. This complex web of interconnections between market and state are a net positive from a regime perspective, so long as the state can keep a handle on the markets and its own state agents.

Keeping it Together: State Legitimacy in the Age of Marketization | Such a change, however, generates a long queue of policy and control issues that the regime is going to have to deal with in order to survive. How is the regime going to stop its middle ranks from using new-found autonomy to break loose from the surly bonds of Pyonyang?

The carrots and sticks that the regime used to offer its mid-ranking officialdom, e.g., better wages, perks (like cars), and party discipline meetings (self-criticism and the like) are not as effective at maintaining loyalty as they once were. They are not effective for the simple reason that the market  offers a salad of bigger carats and other vegetables with only a few splinters to keep them in line. Officials can leach off and distort the markets in many different ways.

First, they can fervently or barely impose state regulations, which ban all manner of common practices (e.g., selling South Korean DVDs), whenever they like and pocket all or part of the fines/bribes (a practice more commonly referred to as “rent-seeking”).[1] Second, they can sell the name of their agency to the highest bidder, allowing people to trade, own cars, and even extract resources in the name of their agency.[2] Third, such economic rents can then be invested in all manner of goods and services, not only luxury items like expensive cars but also in businesses. The nascent finance sector in the North can also serve a profitable investment. Credit and money changing (so-called 돈장사) are reported to be highly profitable. The wives of mid-ranking officials have been known to start businesses off the back of their husband’s successful rent-seeking.

The gap between the central government and regional officials, and the gap between mid-level officials at the centre and people at the apex of power, is significant and worrying for the regime. Even though Songbun (성분; official stratification of North Korean societal status) has been effective so far, the economic case is different because the economic link between the central party-state and Songbun has to some extent broken down as a result of marketization. Corruption, according to Noland and Haggard (see footnote 1) is a major problem, and this reflects the state’s inability to regulate the lower tiers of the bureaucracy. Official seats offer them many privileges that can be used to extract rents, but these rents also mean becoming increasingly economically independent from the state. This is very worrying for the regime. The regime should be worried because of what happened in Romania where mid-ranking officials overthrew Ceausescu in 1989 and replaced him with a corrupt regime in their own image. Rent-seeking, either in the form of bribe-taking or the use of state resources for private gain, is dangerous for the regime. It allows regional and mid-level officialdom to become increasingly detached from the top and outside the state’s sphere of influence.

A Honda motorcycle (probably not a real Honda) in North Korea; the appearance of these bikes is a relatively new phenomenon in North Korea. | Image: Stephanie Kleine-Ahlbrandt, used with permission of the photographer

At a Crossroads: Reform as a Matter of Survival  | If the ruling elites want to reverse the trends that are undermining their power, then they need to use their now fledgling chunk of the economy to grow the economic pie. This will enable them to create new mechanisms by which to bind mid- and low-ranking officials to the central state in Pyongyang. As the size of the pie grows, the central government will also become more interested in capturing parts of that pie via an effective tax system.  A tax system allows for local growth while still providing Pyongyang a mechanism to monitor and benefit from the nascent markets; above all, it keeps the state and the economy connected.

The regime today is at a crossroads. The market economy has developed rapidly in the last 20 years; North Koreans no longer live in a country of famine, but they continue to fight for survival. They farm, they make simple handicrafts, they cook (there is a thriving restaurant industry in the North), and they trade with China.  Even each of their missiles appears to be artisanal in that each one is individually made with no interchangeable parts. There is a growing private finance industry in the North providing access to ersatz capital markets, and the de facto privatization of state industries, like transport and mining, has led to the provision of services and increasing amounts of foreign currency earning exports—a subject Christopher Green covers in the Yuanization of North Korea’s economy. The North Korean state now has to move to harness this dynamic economy. It has been living on borrowed time for awhile; without reform it is surely doomed. Its people are becoming more  aware of how backward their country is and how much their state is to blame for their continued poverty. The regime has held on thus far, but given the circumstances inside the country, reform is increasingly looking like a necessity for continued regime survival.

Further Readings

Andrei Lankov, “The Limits to Marketization: State and Private in Kimist North Korea,” Sino-NK, June 14, 2013.

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

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