Marketization of the North Korean Economy – A Korea Strategic Outcomes Virtual Think Tank Report

July 2018 No Comments

[Q7] Many analysts indicate that due to the partial marketization of the North Korean economy, the economy has stabilized somewhat. What were the key reasons the regime made the decision to marketize? What factors inhibit a broader marketization of the economy?

Author(s): George Popp (NSI, Inc.)

Summary Response

This report summarizes the input of 12 insightful responses from the Korea Strategic Outcomes Virtual Think Tank (ViTTa) expert contributors. While this summary response presents an overview of the key expert contributor insights, the summary alone cannot fully convey the fine detail of the contributor inputs provided, each of which is worth reading in its entirety. The expert contributors identify factors that explain the apparent condoning of controlled marketization in North Korea, as well as factors that appear to be inhibiting broader marketization in the country. This summary first discusses the key drivers of North Korean marketization and then considers the primary inhibitors to broader North Korean marketization efforts.

Key Drivers of North Korean Marketization Efforts

Four key reasons emerge from the expert contributor responses as primary drivers of North Korean marketization efforts.

The economic downturn and famine that engulfed North Korea and eventually led to the collapse of the country’s Public Distribution System in the 1990s.
The rising expectations and aspirations of North Koreans that have started acclimating to marketization.
The emergence of Kim Jong Un and new economic development policy.
The reassuring precedent from China integrating itself into the international system in a way that promotes significant economic growth and development while preserving the security and legitimacy of its political system and regime.

Economic Downturn, Famine, and the Collapse of the Public Distribution System

The reason most frequently cited by the contributors to explain marketization in North Korea is the significant economic downturn and famine that engulfed the country in the 1990s and early 2000s, what Dr. James Hoare of Chatham House describes as North Korea’s “economic meltdown.”1 A weak North Korean economy was struggling, as economic infrastructure and equipment decayed and agricultural land wore down. Environmental challenges (e.g., flooding, drought) only made the situation more difficult. All of these obstacles, interacting together, put serious strain on the economy, making an already troubling economic situation even more problematic.2 The situation eventually grew even more dire when, unable to withstand the economic downturn, the regime’s central ration system for providing food and other necessities to its people, the Public Distribution System, collapsed, sparking widespread famine and desperation across the country, with many North Koreans left by their government to survive on their own.

Several contributors point to this collapse of the Public Distribution System as the proximate cause of North Korea’s initial shift toward marketization.4 The collapse meant that the regime was no longer capable of providing basic necessities. No longer able to rely on the regime for basic needs and survival, North Koreans took desperate measures including turning to informal markets for sustenance.5 Despite concerns over the legality of such informal markets, and an overall ideological opposition to marketization and capitalism in general, the regime did not move to quash these activities, seemingly concluding that the seriousness of the situation warranted concession. Soojin Park of the Wilson Center explains that the regime was ultimately left with “no choice but to tacitly condone” and tolerate the spread of commercial activity and marketization across the country, as it offered a means of survival for many North Koreans.6 Thus, an informal market economy emerged to help fill the void left by the failure of the regime’s Public Distribution System.

Importantly, this progression suggests that North Korean marketization initially resulted from what appears to be largely a bottom-up, rather than top-down, process.7 Park states this point directly: “North Korea’s marketization did not come about by design, but rather as a result of the state’s failure to sustain the livelihoods of its population.”

Rising Expectations of North Koreans Acclimating to the Market Economy

The rising expectations and aspirations of North Koreans who have started to benefit from marketization is also cited by contributors as a key reason for the regime’s decisions to allow limited marketization.8 The failure of the regime’s Public Distribution System unintentionally opened the door to private enterprise in North Korea, and introduced many North Koreans to the idea of a market economy. It also provided many North Koreans with an opportunity to witness first-hand some of the advantageous aspects of marketization. Since the regime’s initial limited opening to the idea of individual citizens profiting from informal market segments outside strict government controls, marketizing activity across the country has increased as North Koreans acclimate to the market economy. These activities, in fact, have created a new class of wealthy elites (“Donju”) who have been able to use their new-found wealth to purchase influence in the country’s economic and political institutions, further adding to their gains.9 Seeing the advancements that have emerged from marketization has driven higher the economic expectations and aspirations of many North Koreans, and has increased curiosity about the kinds of economic advancement opportunities that could arise from further broadening marketization within the country.

Any attempt by the North Korean regime to significantly curb marketization, therefore, is likely to face some degree of pushback from the North Korean population.11 Park reminds us of the regime’s unsuccessful attempts to curb private entrepreneurship and decelerate marketization in 2007 and 2009. She explains that “such attempts, including the currency reform measure in November 2009— redenominating 100 won for 1 won—angered the people and were met with direct resistance, though short of rebellion.” This pushback, Park suggests, helped the regime “realize that it would need to tolerate and allow market activities and marketization as a way to counter the people’s complaints.”

North Koreans with rising economic aspirations are likely to look to the Kim regime to establish and maintain an economic environment that will empower them to achieve their ambitions. The onus, therefore, is on the regime to stimulate and develop the North Korean economy. Not doing so, and diverging from popular expectations, could hurt the regime’s legitimacy even more so than maintaining tight centralized control. In fact, Ken Gause of CNA suggests that the Kim regime is already feeling pressure from North Korean elites on this front:

The idea that Kim Jong Un came to the notion of diplomacy and engagement as a result of the Maximum Pressure Campaign is a fallacy. He has been preparing the country for this moment since 2012. That said, he doesn’t have a lot of time. He is on a clock. By opening up the markets, he has exacerbated the differences in economic classes. The so-called moneyed elite (“Donju”) have rising expectations and have suffered as a result of the sanctions. This class of elite is particularly critical to Kim’s hold on power. Only through opening to the outside world, albeit in a controlled fashion, can he satisfy this demand. If left unsatisfied, his legitimacy will begin to suffer.

The Emergence of Kim Jong Un as the Leader of North Korea

Contributors also consider Kim Jong Un’s emergence as the leader of North Korea to be a key driver of the country’s economic decentralization.12 The contributors generally believe that Kim has exhibited noticeable interest in economic development and marketization since taking over control. For example, he frequently discusses economic development in public, has initiated several highly-visible economic development initiatives (e.g., sparkling new apartment blocks in Pyongyang, the Masikryong Ski Resort in Kangwon Province, and a new international terminal at the Kalma Airport in Wonsan), and has instituted market reforms in the interest of promoting development and growth.13 Moreover, Kim appears willing to both accept some degree of marketization in North Korea and capitalize on markets within the country for economic and political gain. Gause even goes so far as to assert that Kim “gave free reign to the markets” upon taking over control. Kim’s objective in doing so, Gause explains, was to help stabilize the North Korean economy by capitalizing on the markets to supply much needed goods and services, as well as to start acclimating the North Korean population to the market economies.

Ultimately, contributors appear to agree with the assessment from Dr. James Platte of the United States Air Force Center for Strategic Deterrence Studies that Kim appears to be “serious about improving the North Korean economy” and is willing to “stake some of his personal legitimacy on economicdevelopment.”

Reassuring Precedent from China’s Approach to Reform

Several contributors suggest that China’s approach to reform might be perceived by the North Korean regime as a reassuring precedent.14 Some of the same factors that drove economic reform in China are likely to be behind North Korea’s efforts to reshape its economic policies. Therefore, North Korea may find reassurance in, and be encouraged by, China’s ability to integrate itself into the international system in a way that promotes significant growth and development of its economy while also preserving the security and legitimacy of its political system and regime. China’s success on this front may entice North Korea into employing a similar approach. Brig Gen Rob Spalding of the United States Air Force emphasizes this point, offering a concise assessment of the dynamics:

Many Asian leaders have witnessed China’s stunning growth and realize you can develop economically yet remain authoritarian because the West will open their societies to you if you act peacefully. It is probable that Kim has finally seen the wisdom of the Chinese approach. This will encourage them to copy China’s economic development model.

Hoare, on the other hand, raises doubt about just how far the North Korean regime would be willing to follow any sort of Chinese model. North Koreans, Hoare argues, “have a very ambivalent relationship with China and resent being told that they should follow a Chinese model. And, of course, they were an industrialized nation well before China.”

Key Factors Inhibiting Broader North Korean Marketization Efforts

There are also three key factors that expert contributors cite as inhibitors to broader North Korean marketization efforts.

The Kim regime’s perception of economic liberalization and broad marketization as a serious and direct threat to its fundamental interest, the security and survival of the regime.
The Kim regime’s tight grip on the flow of information in the country and its desire to create ideological purity.
Structural factors (e.g., productive capacity is severely lacking, the economy is severely constrained by limited foreign investment, there is currently no financing mechanism for providing capital at the individual level, legal protections for foreign businesses are quite weak, markets are still technically illegal and rife with corruption, and international sanctions have prevented the benefits afforded by globalization).

Fear of Economic Liberalization Threatening the Regime’s Fundamental Interests

The Kim regime appears to view economic liberalization and broad marketization as a serious and direct threat to its fundamental interest, the security and survival of the regime.15 Thus, while Kim has demonstrated a willingness to accept some degree of marketization inside North Korea, he is not likely to tolerate any sort of political reform or interference coinciding with economic reform initiatives. Nor is Kim likely interested in fully opening the North Korean economy to broad marketization, as doing so could risk the kind of significant economic and social change that could spark political instability. It would also likely reduce the regime’s ability to maintain absolute control over the population and undermine the regime’s legitimacy.16 As Park explains, “a totalitarian state like North Korea which is maintained under strict control over its people and society becomes increasingly vulnerable when it allows greater liberalization…while willing to accommodate some marketization, the regime is still very vigilant to keep it at a manageable level.”

The Kim regime seems to ultimately be facing an interesting dilemma between balancing its political aspirations, which seemingly best align with a centrally planned and controlled economy, and its economic aspirations, which may be best served by great economic liberalization. Dr. Bruce Bennett of RAND offers further reflection on this dilemma: “the regime knows that if it allows too much market activity, the legitimacy of the regime will be undermined. But if the regime cuts the markets back too much, the North Korean economy will begin to fail.”

Tight Control Over the Flow of Information

The Kim regime’s tight control over the flow of information across the country is cited by contributors as a key factor inhibiting broader North Korean marketization efforts.17 The Kim regime strives to maintain absolute control over the population. In North Korea, this also extends to having absolute control over the flow of information. This information control is a part of Kim’s initiative to create what he calls “ideological purity” across North Korea.18 Platte explains that “to enforce ideological purity and reduce chances for bottom-up political reform, Kim Jong Un likely will retain or strengthen controls meant to limit external influence on North Korean people. News, pop culture, and other media from the outside world, especially from South Korea, will be limited to trusted classes, as will interaction with outsiders.” The current, fully controlled information environment that provides most North Koreans with little to nothing in terms of information freedom, together with the regime’s ideological purity initiative, create conditions that are fundamentally contradictory to the idea of broader marketization.

Structural factors

Finally, the contributors also reference several structural factors that further inhibit broader North Korean marketization. These structural factors are listed below.

Productive capacity is severely lacking.
The economy is severely constrained by limited foreign investment.
There is currently no financing mechanism for providing capital at the individual level.
Legal protections for foreign businesses are quite weak.
Markets are still technically illegal and rife with corruption.
International sanctions have prevented the foreign direct investment, resources, and markets afforded by globalization.

Subject Matter Expert Contributors

Dr. Bruce Bennett, RAND; Dean Cheng, Heritage Foundation; Dr. Richard Cronin, Stimson Center; Ken Gause, CNA; Shihoko Goto, Wilson Center; Dr. James Hoare, Chatham House; Dr. Gregory Kulacki, Union of Concerned Scientists; Soojin Park, Wilson Center; Dr. James Platte, United States Air Force Center for Strategic Deterrence Studies; Anthony Rinna, Sino-NK; Brig Gen Rob Spalding, United States Air Force; Yun Sun, Stimson Center

This publication was released as part of SMA’s Strategic Outcomes in the Korean Peninsula project. For more information regarding this project, please click here.