North Korea begins journey from feudalism to crony capitalism
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Woken before dawn, the group of foreign journalists were stripped of their mobile phones and piled on to a bus. They were in Pyongyang and, officials insisted, about to witness a “big and important event”. Tensions were high amid fears that the US could target the North Korean capital and a show of force from the Kim Jong Un regime seemed imminent.
The destination struck a different note, however. When reporters disembarked, they were greeted not with the sight of an intercontinental ballistic missile, but instead a wide boulevard lined with skyscrapers. The world’s press had been brought to bear witness to the April opening of Ryomyong Street — a construction project that has become a symbol for North Koreans of their nation’s economic development.
Since ascending to power five years ago, Mr Kim has openly put economic growth at the heart of his agenda, alongside the development of nuclear weapons — a dual-track policy known as the “byungjin line”.
The result has been gradual market-based reforms that have led to swift growth in private enterprise and an uptick in the standard of living that defies western preconceptions about the erstwhile Stalinist state, according to a host of North Koreaexperts, intelligence sources, former residents and business visitors.
“North Korea has gone from a very tightly controlled state socialist economy to basically a marketising economy,” says Sokeel Park of Liberty in North Korea, a group which helps scores of people defect every year. “It may be two steps forward, one step back, but it seems in the long run it will be very difficult to truly repress and move back to a state-run economy.”
At a time when the US is trying to squeeze the Kim regime through new sanctions — pressure that is likely to increase as a result of the death of US student Otto Warmbier who was jailed in North Korea — the economy is showing signs of vitality that could make it even harder to exert leverage on Pyongyang.
Any analysis of the North Korean economy has to proceed with some caution. Reliable economic data for the isolated nation are scarce and estimates vary wildly. Forecasts for 2015 growth in gross domestic product per capita ranged between -1 per cent by the Bank of Korea in Seoul to 9 per cent from the Hyundai Research Institute.
“The challenges of accurately computing North Korea’s GDP are many and are derived principally from a paucity of credible macroeconomic data,” says Kent Boydston, analyst at the Peterson Institute for International Economics.
But for close watchers of the reclusive nation, the signs of change are clear. Notably, wages have surged, as has the growth of a moneyed class known as the donju.
“The changes are obvious when you go to Pyongyang. There is vehicular traffic and the city has a skyline like never before,” says a former US intelligence official, pointing out the growing use of previously rare items like solar panels and air conditioners.
The reforms, which have led to a boom in de facto private enterprises, have been almost entirely implemented informally, with little mention in the state media. Mr Kim cannot be seen to question the ideological legacy of his father and grandfather — the previous leaders who both decried the free market — for fear of raising questions about his own position, says Andrei Lankov, a prominent Seoul-based academic who lived in Pyongyang.
“Kim Jong Un has decided to do something his father was afraid of — he has started introducing significant elements of the market economy,” adds Prof Lankov. “He has basically said it is OK now to do business, but that does not mean liberalising politics.”
In effect, Mr Kim is taking early steps to implement the sort of model followed in recent decades by both China and Vietnam, which have promoted growth through market reforms while maintaining tight political control.
Mr Kim leaves few obvious fingerprints. Analysts say he has operated partly by not doing anything to damage grassroots private business. At the same time, the selection of senior officials to work in the economic area suggests that Mr Kim has an eye on growth. Presiding over the opening of the skyscraper-lined boulevard in April was Pak Pong Ju, who was ousted as prime minister in 2007 for pushing market-based reforms but who now oversees the economy.
Lim Kang-taeg, a researcher at the Korea Institute for National Unification, points out that “market activities are occurring within the boundary of the state’s control”. He added: “Kim Jong Un is viewed as a practical figure as he tolerates market activity to some extent, seeking to give people a better life.”
The result, according to North Korea watchers such as Prof Lankov, is “a significant improvement in living standards” and economic vibrancy, most evident in the flourishing number of restaurants and markets.
Known as jangmadang, these markets — both official and unofficial — have proliferated rapidly in recent years and are now increasingly the norm for purchasing consumer goods. According to a survey of more than 1,000 defectors by the Korea Development Institute, a state-run think-tank in Seoul, more than 85 per cent of North Koreans now use these markets for food, compared with 6 per cent who rely on state rations.
Wages have also appeared to increase exponentially in recent years. According to the institute, salaries in the official state sector have increased more than 250 per cent in the past 10 years to about $85 (more than 75,000 North Korean won) a month, while wages in unofficial “side” jobs, such as private enterprises, have boomed more than 1,200 per cent. Lee Byung-ho, then head of South Korea’s intelligence service, estimated earlier this year that 40 per cent of North Korea’s population is now engaged in some type of private enterprise.
“The North Korean economy is the illegal — or unofficial — economy,” says Daniel Tudor, co-author of North Korea Confidential, a book on the country’s emerging capitalism. “North Korea is going from feudalism to crony capitalism.”
These unofficial enterprises are typically set up within government ministries, where wealthy individuals can bribe officials for the right to establish a company, says Mr Tudor. Unfettered by the state, that individual will then pursue his own enterprise, returning a cut, typically 30 per cent of income, to officialdom every month. “It is like a form of tax,” says Mr Tudor.
In addition to the tacit acknowledgment of private business, Mr Kim has implemented broader agricultural and industrial reforms, allowing managers greater responsibility and autonomy.
“The biggest misconception about North Korea is that it is all state-run,” says Andray Abrahamian of Choson Exchange, which supports entrepreneurs in North Korea by providing business and marketing training. “Kim’s brand is associated with the economy and that rhetorical association has been matched with an increase in the quality of life and consumer goods.”
For Mr Abrahamian, who has visited North Korea 29 times, there are even early signs of emerging North Korean conglomerates, or chaebol as the business groups are known in South Korea.
“There is something of a conglomeratisation taking place, not dissimilar to what you see in Japan or South Korea. There are certain sectors that are proving more profitable and there is a scramble to get in,” he says.
Mr Abrahamian points to the example of Masikryong, a group that runs a ski resort, produces bottled water and operates buses and tours. Air Koryo, the national airline, which also runs one of Pyongyang’s handful of taxi companies and recently began selling tinned pheasant, also fits the bill.
After surging ahead of its southern neighbour in the immediate aftermath of the Korean war, the North Korean economy began to stumble in the latter half of the last century, eventually hitting rock bottom with a devastating famine that killed hundreds of thousands in the mid-1990s.
Although it has since been boosted by the development of grassroots capitalism, it has yet to harness what Kwon Goohoon, a Goldman Sachs economist, calls its “strong untapped potential”, including an abundant labour force and bountiful natural resources such as coal, uranium and iron ore.
Even with the modest signs of reform the economy remains stifled by power shortages, decaying equipment and sanctions enforced after Pyongyang’s nuclear weapons tests.
For Mr Park, the investing environment is treacherous and undercut by North Korea’s “strong instinct for isolationism”.
“Which entity sanctions North Korea the most? It is the North Korean government,” he says, pointing to the example of the Ebola crisis in 2014 when Pyongyang shut its doors to its few thousand yearly visitors, despite the absence of the disease in the region.
In May, authorities hosted a trade fair featuring more than 230 companies from countries including Indonesia, Italy and Belarus, the state-run KCNA agency reported. A presiding official said the event would boost friendships and promote regional development.
But investors have little trust in the country’s relationship-anchored mode of commerce and lack of rules. The only outsiders proven able to navigate the tricky business environment are ethnic Korean-Chinese, who speak the language and maintain the prerequisite connections to their homeland.
The lack of real foreign investment is likely to be a sore spot for the regime, which has heavily promoted the nation’s 24 special economic zones. In March, the Mount Kumgang special development zone announced it was seeking a $20m investment from overseas entities to set up a casino-equipped cruise ship that would ply waters between South East Asia, North Korea and Russia.
Despite the official flexibility on gambling, which is banned elsewhere in North Korea, it is unclear whether the scheme received any interest.
“In the emerging North Korean economy, the only failure is foreign investment,” says Prof Lankov. “Foreigners arrive and discover they have to build all the infrastructure”, or they are conned out of their investment completely.
The lack of outside interest leaves North Korea reliant on China — its main trading partner and long-time ally.
“North Korea has come to the realisation that they are too dependent on Chinese imports and this gives Beijing significant leverage over them,” a former US official says.
As Pyongyang has accelerated its nuclear weapons programme, Chinese President Xi Jinping is under pressure from US President Donald Trump to impose more stringent sanctions on Mr Kim. In February, China banned coal imports from North Korea — a move that Mr Kwon believes could hit the North Korean economy for $1bn a year.
However, few believe China is bringing its full weight to bear on North Korea, and on Tuesday Mr Trump declared its efforts a failure. “While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!” he tweeted.
Meanwhile, officials in Beijing are also refusing to take calls from their counterparts in Pyongyang.
North Korea has responded by criticising its benefactor on state media. “They are desperate to find investors that are not from China. In their minds, it is anywhere but China,” says Mr Abrahamian.
Additional reporting by Kang Buseong