And the Show Goes On: How the State Survived Marketization

By | September 01, 2014 | No Comments

Tattered but still functioning, the North Korean state is adjusting is relationship with society via the market.

Tattered but still functioning, the North Korean state is adjusting its relationship with society via the market. | Image: Stephan/Flickr, Creative Commons 2.0

The 1990s were trying times in North Korea. The breakdown of the Public Distribution Service and low crop yields spelled disaster for many. The famine that is referred to domestically as the “Arduous March” [고난의 행군] resulted in the deaths of many hundreds of thousands, or, by some estimates, several million. The famine did not just affect people, it also transformed North Korea’s economy and state-society relations. As a response to the collapse of the socialist system, small-scale markets sprung up across the country as mediums for exchange and means for survival. Because marketization fell outside the boundaries of the state’s traditional remit, it was perceived externally as a bottom-up challenge to the state’s authority and legitimacy. Unable or unwilling to eliminate this challenge, the state co-opted it–or tried to.

The state’s response to marketization is a popular research topic among senior North Korean Studies scholars in South Korea. However, the English-Korean linguistic barrier prevents many readers from accessing their work. Fortunately, a handful of up-and-coming Koreanists, including some writing for Sino-NK, are striving to bridge the divide. In the third installment of his review series on marketization in North Korea, Peter Ward  examines how the state continues to deal with marketization in post-famine North Korea by looking at a key piece by expert Yang Mun-su. — Steven Denney, Managing Editor

And the Show Goes On: How the State Survived Marketization

by Peter Ward

In 2010, a leading scholar of the North Korean economy, Yang Mun-su (양문수) released an important monograph, The Marketization of the North Korean Economy [북한경제의시장화]. The book is a compendium of Yang’s major work on the North, covering a wide range of important issues including state and market, foreign trade relations, labour relations, the center and the regions, and the broader topic of reform. A short article like this cannot cover the book in any depth (it is a 450 page monograph bursting with factual information and analysis). Rather, it will focus on one of the longer and more general sections of the second chapter, entitled “Coexistence of Plan and Market: Characteristics of North Korean Dual Economy Structure” [계획과시장의공존: 북한식이중경제구조의특징].[1]

Research Objectives | This section discusses the government’s attitude toward the markets up to 2010, including a brief mention of the currency reform of 2009 (Yang postscripts the text with a chapter dealing with the reform in more detail). His main focus, though, is the reforms of the early 2000s, followed by the state’s attempts to fight the growing power of the market economy. Yang’s analysis of this period is one of the most frequently cited and influential among those writing in Korean. Given the last two subjects covered in the present series (see: review 1 and review 2), it makes sense to delve into the state’s response to marketization, having surveyed work on the history of markets in North Korea before the 1990s and following the collapse of the Eastern Bloc.

Methodology and Background | Faced with a lack of statistical data (the bedrock of most economic research), Yang is forced to mobilize sources which are unconventional by the standards of an economist. These include interviews with North Korean refugees who worked as successful market operators in the “grey economy,” as well as North Koreans who worked within the state sector during the time surveyed. Additionally, Yang draws upon an extensive and sophisticated reading of North Korean official sources, making liberal use of Economic Research (경제연구), North Korea’s state-produced economics journal. He also makes use of NGO publications like Good Friends (좋은벗들) and Daily NK to further supplement his analysis.

Research Findings | The chapter is divided into five sections: (1) The State’s Policy Line; (2) 7.1 Measures and Policies Promoting Marketization; (3) Policies that Aimed at Curtailing Marketization; (4) The Features of the Dual Economy (by far the longest section); and (5) Prospects: The Future of the Dual Economy. For the sake of convenience, these will be discussed in order.

The State’s Policy Line | According to Yang, at some point in the late 1990s or early 2000s the North Korean government accepted the new market order as a fait accompli. It was decided that the North Korean people should be left to take care of their own livelihoods,while the state ensured the core was maintained: to wit, the elites, the Kim family, and the military (and security forces). Thus, parts of the state economy not deemed vital to the core functions of the regime were granted autonomy, and factory managers were allowed to trade and engage in private commerce. Markets were permitted and even accepted. Citing Economic Research, Yang explains the regime’s vision for the market economy: a market which supplements the planned economy by aiding the spread of goods produced by the socialist economy. Private trade and private production are missing from this vision, but the fact that the existence of markets is admitted within North Korean publications, and that the state envisions a positive economic role for them, are significant facts (pp. 65-71).

7.1 Measures and Policies Promoting Marketization | As the state economy collapsed, the market rose to take its place. Such changes did not go unnoticed by the North Korean government, and it attempted different solutions to the problem of cohabitation. Among these, the July 1 Economic Management Improvement Measure [7.1 경제관리개선조치] was brought in during 2002; this will be discussed in a moment. First, it is important to discuss the events that presaged the state’s de facto recognition of the grey economy.

At the time, somewhat paradoxically, the North Korean economy had already begun to recover from the famine of the late 1990s (p. 71). Yang notes that as a prelude to these measures the regime began to emphasize the importance of “pragmatism,” from 1998. At the same time, the regime had a much friendlier foreign policy partner to deal with in South Korea, from 1999 (p. 72).

The July 2002 measures were remarkable for a number of reasons. First, they represented what appears to have been a genuine attempt by the state to adapt to the spread of markets by raising both state prices and wages to reflect market realities. Yang describes this policy as aiming to bring back under state control goods and services that had leaked into the private sector. Second, the state conferred unparalleled managerial autonomy upon the leaders of state enterprises to manager their workers, enterprises, and budgets to a far greater extent than they had hitherto been allowed. The aim of the latter was to stimulate the growth of the state sector. Third, as part of these measures, the state established “Socialist Markets for Goods Exchange” [사회주의물자교류시장], which presaged the introduction of “General Markets” (종합시장) in 2003. To paraphrase Yang, this move did not just reflect a “post-factum confirmation of the spread of the black market, its legalization, but furthermore, that the regime’s perception of the markets had become positive” (pp. 73-76).[2]

Policies that Aimed at Curtailing Marketization | The July Measures of 2002 are widely considered among South Korean scholars of North Korea to be the start of an era in which the state cohabited with the market economy in North Korea. However, this period of moderate permissiveness was short-lived. Yang dates the start of the regime’s attempts to roll back the power of market forces from 2007.

The regime mobilized a number of policies to weaken markets and their operators at this time, including age restrictions on those allowed to trade (often only older women were permitted to trade), restrictions on opening hours (sometimes restricted to afternoons only), restrictions on what could be sold (for instance, non-agricultural products were banned from early 2008), and restrictions on the kinds of operations open to private market actors (for instance, the regime shut down many de-facto private bus companies and restaurants). Moreover, from 2009, the regime sought to reduce the actual size of markets, gradually closing General Markets and attempting to reduce them to their former status as mere Farmer’s Markets. The regime also delivered a further blow to the market economy by mobilizing the people for “speed battles” (pp. 78-79). Yang places this in the context of the time. In 2008, Kim Jong-il in his June 18 Statement instructed state officials to intensify their control of the market economy while adhering to socialism. Yang argues that this reflected a change in the regime’s perception of the market. At the same time, the state sought to revive the moribund parts of the state economy, giving women under 40 jobs in state enterprises, thus prohibiting them from engaging in market activities (p. 80).

In the end though, such attempts to curtail the spread of markets and to revive the state economy hit a brick wall: the state was not able to revive the state distribution system for want of funds. Thus, attempts to de-marketize the consumer economy did not bear fruit. The state had little choice but to accept private production and commerce in order to prevent another famine from occurring (p.83).

Market in a small village in Onchon County, South Pyongan Province. | Image: Stephanie Kleine-Ahlbrandt

Market in a small village in Onchon County, South Pyongan Province. | Image: Stephanie Kleine-Ahlbrandt

The Features of the Dual Economy | In Yang’s schema, the North Korean economy today is not a “mixed economy,” where the state and market coexists, but rather a “dual economy.” Whether he chose the term to emphasize the regressive nature of the planned economy in North Korea is not clear, nonetheless that seems to be implied.

Yang argues that North Korea today is a country of two economies, one parasitic and one productive. The market economy generates profits, economic growth and productive employment, while the state increasingly parasites off of it for its survival, officials seek to leach off of productive workers and business people. At any rate, in Yang’s schema the market economy has four components: an industrial market, a market for consumer goods, a capital and financial market, and a labour market. The private market for producer goods (raw materials, machinery, and other goods used in production) has steadily developed since the collapse of much of state’s planned economy. The capital market in North Korea now revolves around specialized private money lenders [전문사업체자] who provide credit to private persons and businesses, as well as state enterprises on the basis of their perceived creditworthiness—the state banking sector, once a source of funds for state enterprises, has largely ceased to function.[3]

The labour market is increasingly characterized by a polarization between those who have succeeded and become “money masters” (돈주; capitalists in North Korean parlance) and those who, many having failed in business, sell their labour to survive. The market for consumer goods is composed of a wide variety of small-scale private service providers (barbers, tailors, caterers, and the like) and small-scale producers (who sell shoes, food, cigarettes and everything in-between). The aforementioned capitalists have also begun to infiltrate the state, leveraging their networks, expertise, and capital and entering into partnerships with state enterprises to supply goods and services while pocketing a share of the resulting profits (pp. 83-86).

State actors are not absent from this picture. In fact, many money masters have direct links to the state, and many state officials have become successful entrepreneurs (or made use of family members as proxies). The state’s attempts to curtail the spread of markets have further privileged these groups because of their access to information, networks, influence and money—all of which have allowed them to profit while other less fortunate individuals have seen their business hit by the strong arm of the law. According to Yang, this has given rise to a set of economic relations characterized by oligopoly and monopoly, as well connected and rich individuals seeking to gain a stranglehold over many different parts of North Korea’s emergent capitalism. As explained on pages 86-88, North Korean society itself is increasingly a “winner-takes-all” affair, in which “the rich get richer and the poor get poorer” [부익부빈익빈].

The state has utilized a variety of means by which to extract rents from the profitable market sector. These include everything from usage fees at marketplaces, to taxes levied on service operators (commission shops, restaurants, billiard parlors, karaoke bars, etc.) and taxes levied on enterprises producing both by order of the state and while producing in partnership with money masters (pp.88-90). The state also demands that its citizens pay a “usage fee” for all property used for commercial purposes. Furthermore, the central and local governments levy a number of irregular taxes and other fees to finance construction projects or the military. Workers and non-working residents are obliged to rear animals or find other tradable goods like gold to render to the state for export. This, in addition to the informal protection rackets that exist between local officials and local business (pp. 90-92). Yang characterizes such actions on the part of the state as being tantamount to “plunder” (수탈; exploitation) on the part of the state. He also characterizes the state as becoming increasingly “dependent” on the market for its own survival.

At the same time, however, Yang goes on to point out that the state economy’s material base has been eroded by marketization. The people have plundered the state in search of the means to survive. State factories were plundered by their own workers in search of scrap metal, machinery, and fittings to sell to China in exchange for food in the 1990s. Marginal state land was converted into private farms. Theft from the state took many forms, but the main reasons were simple enough: people stole to survive and they sold to make better lives for themselves and their families (pp. 93-95).

Thus, Yang describes state-market relations as being partially antagonistic and partially complementary. The state provides resources like land, electricity, transport, and security for the market, and the market provides tax revenue, as well as goods and services to the people (and the state). But these relations also have a darker side. The state plunders (by force where necessary) the surplus created by the market (taxes and bribes; the line between the two is not distinct), and the market also plunders the state for resources (often natural resources that are technically state property—coal, for instance), the very presence of markets corrupts the state in that it engenders corrupt behavior amongst the state’s officials (pp. 95-97).

Implications | The implications of Yang’s research are obvious. The North Korean government is caught in a bind. On the one hand, markets feed the people and ensure that the state has a ready supply of revenue. On the other, while they have to be tolerated to some extent, blanket legalization and acceptance is potentially political suicide as it would destroy the regime’s ability to monitor its own people. Markets also corrupt the regime’s own officials. Hence the regime adopts a position of periodic crackdowns, followed by periods of toleration in an attempt to ensure that markets continue to produce the goods, services, and profits that the North Korean people and the state need,while stopping them from growing into a force that might rival or topple the state.

[1] Full citation in Korean: 양문수, 북한경제의시장화, (한울: 서울, 2010), 65-103.

[2] As Yang put it, “이조치는암시장의창궐에대한사후적추인, 암시장의양성화라는측면도있지만여기서한걸음나아가시장의역할에대한인식이긍정적인것으로변화했음을보여주고있다” (p. 76).

[3] As Christopher Green notes, this distinction is not as clear as Yang arguably makes it appear. After the state banking sector declined drastically in the 1990s, part or all of the network of moneylenders that replaced it as the main provider of investment capital became, and remains, closely linked to the state. For more, see: Yoon Cheol-gi, “De-industrialization of the North Korean Economy and Tendency toward Self-Privilege of Bureaucratic Class” [북한경제의 탈산업화와 관료의 자기특권화 경향], Treatises on Korean Political and Diplomatic History [한국정치외교사논총], 35, no. 1 (August 2013): 120-122.

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