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N Korea - no longer 'starving' or 'Stalinist'

Its growth has been fuelled by the emergence of private entrepreneurs who have created a market economy, without the approval or disapproval of the state.

North Korea's Mr Kim (centre) visiting a trial operation of a new type of trolley bus. He is overseeing an economy with growing private participation

THE supreme leader of North Korea, Kim Jong-un, is overseeing an economy with growing private participation, amid strong indications he will undertake financial sector reforms in order to privatise the large state-owned companies, and in the more distant future set up a stock market as an avenue to raise funds.

The citizens of the country have not waited for the government to roll out a privatisation programme. They have begun doing so themselves, as the state alternately encourages them and looks the other way because all assets technically belong to it.

Mr Kim, who is just in his mid-30s, is different from his father, Kim Jong-il, who did not favour widespread privatisation. The son's encouragement of the market economy is evident.

The share of the private sector is now estimated at 30-50 per cent of GDP, which is believed to have grown between 2 to 4 per cent over the past few years.

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The analyst Andrei Lankov provides an extraordinary snapshot in an article for the Carnegie Center Moscow, reporting that the presence of new rich business people (many of whom are women) is on display in Pyongyang and other major cities.

"They account for the majority of patrons in the upmarket restaurants popping up across the city," and "although meals cost US$15 to US$25, roughly equivalent to the average family's weekly or fortnightly income, these places are always crowded," he explains.

Property prices are going through the roof, he reports, with prices rising 10 times over the past 10 years, and a good apartment in Pyongyang costs about US$100,000, and the best homes are worth US$200,000. Although houses cannot be owned privately and people buy and sell "residence rights" only, most people see this as convenient legal fiction.

Even though land is state-owned in principle, it is given for cultivation to individual households and farmers in return for a share of the harvest which ranges from 30 per cent to 70 per cent.

The most impressive reform of Mr Kim is in agriculture. The country has achieved record-breaking harvests, making it nearly self-sufficient in food production.

There are plans to conduct industrial reforms by decentralising management and partially privatising state industries. In a test case, intercity bus operations were effectively privatised in the late 1990s.

North Korea's domestic reforms need not wait for the United Nations to ease or lift its sanctions. But a massive economic reconstruction by South Korea must wait.

Nonetheless, in August, the president of South Korea, Moon Jae-in, proposed an economic package with North Korea consisting of joint economic zones and a rail and highway link across their common border, in return for the North to begin abandoning its nuclear weapons.

Mr Moon believes that the rail network would make it easier for South Korea's exports to reach China, Russia and Europe. Groundbreaking will be performed this year for the highways and the railroad.

As tensions have eased, Mr Moon also proposed establishing "special unification economic zones" along the border. In July this year, a committee set up by him visited the Rason Special Economic Zone, which was established in 1992 in the extreme northeast of North Korea. It was supposed to serve as a manufacturing hub for South Korean companies looking to tap into the North's abundant supply of cheap labour, but the sanctions prevented their entry.

On the one hand, Pyongyang now wants to follow the Chinese economic model, and on the other it has long been studying Western economic systems.

From 2002 to 2009, the European Institute of Japanese Studies at the Stockholm School of Economics held workshops for North Korean policy planners and academics. The workshops offered lectures on economic modernisation, accounting, management, and international trade.

European Union (EU) delegations visited North Korea in 2004, 2005 and 2007 and held seminars on economic cooperation. In March 2002, a North Korean economic delegation visited the Bank of England, the London Stock Exchange, and the Financial Services Authority. Supreme leader Kim Jong-il was keen to learn about the European economies.

Before a stock market can even be planned, critical financial reforms are needed. In the book, Unveiling the North Korean Economy: Collapse and Transition, Byung-Yeon Kim explains that the reform of the banking system should start with the introduction of a two-tier banking system, splitting the central bank of Korea into two parts, one performing monetary oversight, and the other overseeing commercial banks.

The household savings bank, Jeogeumso, should be separated from the central bank and turned into a commercial bank. Next, commercial banks should be created, initially under state ownership and later privatised. The creation of money markets and a securities market is essential, with interest rates being determined in the money market.

The development of a stock market would be driven by the privatisation of state-owned enterprises. Already there are private mines, truck companies and oil refineries operating in North Korea.

In his article, "Marketization in North Korea", Yoon Park explains that as much as 30 per cent of the service sectors such as restaurants, shops, service stores and trading companies are believed to be run by private owners, with almost 50 per cent of restaurants and 40 per cent of shops run by private firms.

Mr Park's study concludes that about 70 per cent of the adult population is participating in market activities. There are more than 400 markets and state-run shops stocking cars, smartphones, electric bicycles, and flat screens TVs.

For now, in line with President Moon's economic thrust, major South Korean conglomerates such as Lotte, Hyundai, Hyosung and KT Corporation are creating special teams to explore North Korean ventures.

The two Koreas have dreamed of reunification since the 1940s. The Moon administration is going ahead with plans for reconciliation with the North, with or without the United States, as Mr Moon prefers to engage the North with his Sunshine Policy of strengthening bilateral ties through economic development, tourism, and cultural exchanges.

The South is aware of the changes afoot in the North, where some of the most successful private enterprises are run by a new moneyed class, known as the donju or rising bourgeois.

As Mr Lankov argues, the cliche of North Korea as a "starving Stalinist country" is outdated because it is neither starving nor Stalinist as its economy has been growing. Its growth has been fuelled by the emergence of private entrepreneurs who have created a market economy, without the approval or disapproval of the state.

  • The writer is editor-in-chief of The Calcutta Journal of Global Affairs