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Growth isn’t necessarily good news for Kim Jong Un

LiveMint logoLiveMint 18-09-2017 Nisid Hajari

Byung-Yeon Kim, a professor at Seoul National University, began interviewing North Korean defectors seven years ago to learn more about their country’s economy. One wouldn’t have thought there was much to discover: Often described as “Stalinist”, the hermetic regime to the north seemed to preside over a crude, centrally planned system, with peasants toiling away for a pittance in collective farms and state-owned factories, dependent on food aid and growing poorer with each passing year.

In fact, as Kim lays out in his new book Unveiling the North Korean Economy: Collapse and Transition, that popular image is almost entirely wrong. By necessity, virtually all North Koreans, from farmers to army commanders, now buy and sell goods and services in capitalist markets—whether to survive or, in some cases, to get rich. The economy is growing and wages are rising; until recent rounds of United Nations sanctions, North Korea was about as dependent on foreign trade as the UK or Italy.

This will come as a disappointment to those who hoped that popular discontent would spell the end of the North Korean regime; despite decades of isolation, the country has stabilized economically even as it rapidly develops its nuclear and missile arsenals. Kim is more sanguine: He sees the spread of markets and money as a threat to dictator Kim Jong Un—whom US President Donald Trump now derides as “Rocket Man”—and a point of pressure that the outside world can exploit. We spoke last week soon after North Korea tested its first thermonuclear device but before its latest missile test flew over Japan. A lightly edited transcript:

Byung-Yeon Kim: Since Kim took power in 2011, the economy has stabilized. While the rate of growth isn’t that high, overall the economy has grown 1-2% for the last five years.

It’s not really a Stalinist economy anymore. North Korea experienced a severe crisis in the late 1990s, when several hundred thousand people starved to death because of famine. Afterwards, the economy changed dramatically. Before, the regime repressed any kind of market activities. But nowadays, households participate more in the informal economy than the official economy. About 70-90% of household income comes from markets.

The reason is quite simple: The government cannot pay a salary sufficient to live on. I talked to one high-ranking diplomat who served in London and defected to South Korea last year. He said that he received a monthly salary of 2,000 North Korean won. At that time, the market rate was 3,000 North Korean won to the dollar. A typical North Korean household needs $50 per month for survival; the remaining part of this need is filled by markets. Some 70% of households participate in markets, while only 50% participate in the official economy. It’s a hugely informalized or marketized economy.

Second, North Korea is not a closed economy anymore. I estimate the economy’s trade dependency ratio is higher than 50%. The world average is 58%.

Nisid Hajari: Critics argue that sanctions won’t work because North Korea is largely self-sufficient. But they really do need trade to survive.

BYK: Exactly. Trade and the markets are a double-edged sword. The markets function well, but they also expose North Korea to a potential external shock, through trade.

More than 70% of consumer goods are imported from China. These transactions require foreign revenue and this revenue comes from trade. So when trade is hit, markets can be hit hard as well. Then the two pillars that sustain the system may collapse.

NH: Can we see any signs of this happening?

BYK: Not yet. When you look at market prices in North Korea, they haven’t moved. Trade has been hit hard: China stopped importing coal for much of this year, so exports from North Korea to China declined by 25% for the first half of the year. But imports have increased. That means consumer goods and food are still coming into North Korea through China.

We know that some North Koreans are rich. We know that rich and middle-class North Koreans have some savings, so therefore they can spend this money. But if imports exceed exports this year and next year, then I would expect possible balance of payments problems because their foreign revenue earnings will be insufficient to sustain imports.

NH: Does the opening of the North Korean economy reflect a conscious decision by Kim Jong Un to reform, as China’s Deng Xiaoping did?

BYK: Kim Jong Un is wiser than his father Kim Jong Il in managing the economy. The major opening took place in the 1990s and it was forced upon North Korea by the food crisis. But Kim Jong Il believed that markets were bourgeois and, in 2009, he tried repressing them through currency reform. He introduced new currency bills and imposed a ceiling on how much each person could exchange; those who had more money than the ceiling were unable to exchange it. But the scheme was a drastic failure. [To address public fury], one high-ranking official was shot and the prime minister apologized to the public.

Kim Jong Un may have thought, “OK, repressing markets may not be possible because today, without markets, people will not survive. So although I don’t like markets, without markets I cannot maintain my power.” So that is some kind of endorsement, but it’s a forced endorsement. Market activities are now tolerated and there are no harsh penalties for engaging in them.

NH: But Kim isn’t pushing forward and implementing reforms that would expand markets or improve their functioning?

BYK: No, I don’t see any clear indication that market reforms have been institutionalized. For example, China began reforms in 1978 by instituting the household responsibility system: Households were allowed to cultivate their land, give some part of the yield to the government and sell the rest in markets. A similar kind of reform was introduced in North Korea, but we don’t have any firm information about whether the reform applies to all collective farms, or was a kind of experiment. If you look at the figures for agricultural production over the last four to five years, they’ve increased but they haven’t increased as much as in China. That means that even though they’ve experimented with this kind of reform, it’s been a rather partial, cautious reform. The same applies to markets. They do something, they may try other things, but there are still institutional constraints that prevent these markets from growing into a full-fledged market economic system.

NH: Is it possible for the regime to maintain this halfway state, to preserve stability without introducing further reforms?

BYK: I don’t think so. If you look at the old socialist countries, they weren’t sustainable in the long run.

There are two possible scenarios for North Korea [to launch Chinese-style reforms]. The first way is compromise. If there’s no repression, then at some point, markets will grow too big to control. They will then claim power from the dictator. Kim Jong Un may say, “You can do what you like economically, but do not threaten my political power.” This will introduce Chinese-style capitalism.

The other scenario is more violent. If Kim somehow loses power, his successor may want to open up. Then we might also see the start of Chinese-style reforms.

NH: And what if Kim chooses not to compromise and tries to maintain the current constraints on markets?

BYK: I think that could lead to a quite violent struggle between markets and the state. Politically, the state is quite intact; there’s no hint of perestroika or glasnost. But three things are undermining Kim’s power. The first is elites: Elites make a lot of money from trade because a big part of trade involves corruption. So, for example, North Korean exporters export cobalt to China, but their reported prices are lower than world market prices. The gap between these reported prices and world market prices goes into the exporters’ pockets.

At the same time, mid-ranking officials can’t live without bribes. The bribe-givers are market participants. So the incentives of these mid-ranking officials are misaligned. Politically they have to be loyal to the dictator. But economically they have to be loyal to markets.

Finally, households understand they can’t live without markets. The state rationing system has broken down, so they are disengaged from the official economy. They’ve changed their mindset as well in accordance with the functioning of markets.

So the elites, mid-ranking officials and households—all three of the main elements of system have changed. They want to preserve markets because that is their means of survival. This will continue to the point where Kim has to decide which way he wants to go. And if he resists, there will be a big conflict.

NH: Does this apply to the military as well?

BYK: Yes, they can’t survive without the markets. The government coffers are rather empty and the government cannot provide any resources to state institutions. Therefore each institution has its own companies and these companies make money and provide resources to state institutions such as the army, Party, the cabinet and local governments.

NH: You’re saying that all of these groups are currently invested in keeping the system stable, but eventually their interests will clash with Kim’s.

BYK: Yes, I surveyed several of the North Korean refugees who came to South Korea after the failed currency reform and they said they were very disappointed because it took too much effort and time and sacrifice for them to build up their businesses. With currency reform, it was all taken away by the state. So they expressed a great deal of anger against Kim Jong Il. If this kind of thing happens again, that could be quite dangerous to the dictator.

NH: What does that mean for the US and others who are seeking to pressure North Korea into giving up its nuclear program? Should they be looking to cut off the North Korean economy, or open it up further in order to erode Kim’s power?

BYK: In the short term, cutting it off is necessary, because trade and markets are the weapons which can be used to change the situation. But in the medium run, these are also the weapons which can change North Korea, and they have to be utilized.

My advice to the Americans is to wait for sanctions to be really effective, rather than planning for an attack. It may take longer, but there is evidence that sanctions can work this time.

They should devote more resources to sanctions. Secondary sanctions will only work if resources are spent on identifying which companies, institutions and individuals work with North Korean businesses—it takes a lot of effort.

Of course, China should be helpful and not drag its feet. I want to persuade Chinese policymakers as well, if sanctions are really working the short run, then they can get to negotiations faster. Then afterwards, the problems will be more limited, and there will be more economic engagement between China and South Korea. So one step backward means three steps forward. Bloomberg

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