Reflections on North Korea’s Economic Reform

William Newcomb, Korea Economics Institute, (excerpted from Korea's Economy 2003, Vol. 19, pps. 57-60) May 2003.


North Korea’s 50-year run as a centrally planned economy is drawing to a close. It is a slow and agonizing death. Although the first set of managerial reforms were announced in mid-2002, a series of missteps and mishaps have hampered implementation, and the program has stalled. Pyongyang is stuck at the initial stage of replacing its Stalinist-influenced command economy with institutions and policies crafted for a socialist-market type of system that, to be sure, will carry the North’s own peculiar stamp. Moreover, assessing the chances that reforms can restore economic growth is complicated by how Pyongyang chooses to deal with its large military burden and how it handles funding and supply relations between the military and civil sectors. Handling the civilian-military relationship is an especially important task now that the policy of putting the military first has become so deeply entrenched.

Because reforms are stalled, a picture of the intended scope and pace of policy changes remains as vaguely drawn as when the reforms were so oddly unveiled, piece by piece, over the course of the summer and fall of 2002. Questions about the leadership’s intent and predetermined boundaries of change are no closer to being answered, and sufficient ambiguity remains to permit a wide and contending range of thoughtful views.

A review of the scant details about extraordinary hikes in wages and prices, the shift from strict rationing to a monetized system, devolution of managerial authority in agriculture and industry, new laws for attracting and administering foreign investment, and a sharp devaluation of the won (and disavowal of the U.S. dollar as acceptable currency for settlement) reveals no aspect of reform that crosses the threshold of systemic change. Even so, Pyongyang appears headed in that direction, and changes in other economic policies, practices, and institutions should be anticipated. One likely sequence suggests that the next stage will involve reforms in the areas of banking, investment, and government finance.

Further movement toward systemic change, particularly if accompanied by measures that provide macroeconomic transparency, should increase the likelihood of North Korea’s obtaining the foreign assistance it will need for rebuilding its infrastructure and basic industries. Even with assistance, rebuilding roads and rails, restoring factory operations, and raising living standards will be a formidable challenge.

Since reforms were adopted, observations by foreign reporters, official visitors, and aid workers have provided no testimony of any visible recovery in economic performance. Statistics published by primary trade partners show that foreign trade returns last year stayed flat. Thus far in 2003, shortages of energy, food, and consumer goods appear to be worsening, and inflation reportedly is accelerating. Foreign investors, who are crucial to the reforms’ success, are staying away, and aid inflows might diminish. A promised, new long-term economic plan based on realistic projections of capability has yet to be revealed.

Reforms clearly have not provided the economic boost the regime had expected to obtain. How interesting, then, that the new measures remain in place, even if unevenly implemented, and that the regime has not revoked them and retreated to more familiar territory. And how disturbing to see the reemergence of exhortation to motivate workers when higher wages were supposed to serve that purpose. Retreat may be nominally attractive to many officials and other elites, but it is not a real option because the planning and distribution apparatus has broken down and much of what was announced as new managerial changes simply institutionalized survival mechanisms that have taken root over the past decade.

Moving ahead with reform and economic restructuring has as a prerequisite the peaceful settlement of the nuclear issue. Prospects for a quick resolution seem dim. Increased hardship likely is in store for the populace while output continues to stagnate. Momentum for further reform will probably dissipate along with initial public enthusiasm. For households, the importance of the informal economy will swell even without further deliberate efforts at reform, further weakening the regime’s established control mechanisms. Most important, the crisis of the 1990s and last summer’s reforms have combined to produce a fundamental change in individual outlook and behavior that could prove nearly impossible to extinguish: in today’s North Korea money matters, just as it came to matter in post-Mao China.

A Brief History of Reform

The imminence of economic reform has been a feature of speculation about North Korea for nearly 20 years. Once China’s reform gained traction in the early 1980s, some thought that Pyongyang would be quick to follow Beijing’s lead—particularly after North Korea opened to foreign investment. After the Soviet Union dissolved, others thought that Pyongyang faced a choice of reform or total collapse. In the mid-1990s, predictions of reform similar to China’s were again ventured—first, when a special economic zone was opened at Najin in the northeast, and, second, when famine gripped the nation. Each time, a case for reform could be made by both pointing out how badly the North’s economy lagged the South’s and reciting a litany of economic problems that range from the excessively high military burden, to the lack of credit due to debt default, to the insatiable demand for inputs, and to the inefficiency of command systems. More recently, Kim Jong-il’s travels to China and his call for “new thinking” about the economy renewed speculation that at last the idea of reform had ripened, only to have interest seemingly subside once again.

When Kim Il-sung was in charge, opposition to reform seems to have been rooted mostly in ideology. He favored state-owned farms over cooperatives, for example, and, according to one story, quashed in the mid-1980s Kim Jong-il’s attempts to experiment with China’s household production model. Following Kim Jong-il’s succession as top leader and the breakdown of the economy, concerns about regime survival trumped notions of reform, despite Kim’s alleged predisposition for making some early changes in economic policies.

In lieu of broad reform, the regime for the past 30 years has settled for a little experimentation in the farm sector and lots of tinkering with administrative mechanisms governing industry and trade. These halting efforts at reform have included a shift to local budgeting and efforts to improve planning in the 1970s, an attempt to boost production of consumer goods in the early 1980s (and again in the early 1990s), and the introduction of limited incentives for factory workers and farmers.

In recent years, changes in policies have been made quietly, with little media fanfare, but are likely served up with liberal amounts of guidance from party and government officials. Most initiatives probably would fall under the category of coping measures. The collapse of the public distribution system brought about the most significant development: the nationwide authorization of farmers’ markets in urban areas. At these markets—off-limits to foreigners—food, medicine, clothing, furniture, and other basic goods reportedly are sold at prices that adjust to changes in supply and demand. These are not, as they are so often labeled, black markets. The buildings that house markets were erected by local government authorities; farmers’ markets are policed, complaints are investigated, and they operate according to posted rules—for example, price gouging reportedly is prohibited and punished. The spread of these markets has fostered the development of small-scale production by cottage industries, has encouraged specialization in market gardening, and has created entrepreneurial opportunities that quickly were filled by middlemen acting as peddlers or even as established wholesalers.

Chronic agricultural production problems similarly prompted government authorities to explore such changes in practices as shrinking the size of work teams, revising the calculation of cooperative farm workers’ earnings, and reducing the amount of grain that farms must provide the state at a low, administered price. A number of foreign nongovernmental organizations were invited to work with local agricul- ECONOMIC DEVELOPMENT IN NORTH KOREA 59 tural authorities to explore new techniques and experiment with new crops.

In industry, plunging output brought about the near collapse of interindustry supply relationships, and goals memorialized in annual plans were impossible to attain. Absenteeism soared as workers who had not received their pay took off to seek food and fuel for their families. The regime significantly relaxed its controls over managerial decisions about production and also provided managers of firms with new authority to negotiate domestic and foreign sales and purchases. Several accounts from the Chinese press suggest that enterprise-arranged trade was conducted on barter terms. To the extent this occurred, the difficulty of arranging trade finance would be yet another illustration of the magnitude of the problems that afflicted the DPRK economy.

The 2002 Reform Initiative

Pyongyang’s reform program surfaced in midsummer 2002 without prior announcement or simultaneous explanation. What the regime did or did not do—and its underlying rationale—was a subject of intense speculation for weeks. Perhaps the most complete and objective account of the reforms so far available was published in 2002 in Annex IV of a United Nations (UN) report.[1] This account relied heavily on official and quasi-official briefings that North Korean officials finally agreed to provide in response to a barrage of questions from resident foreigners and from members of the Chosen Soren, an organization of North Korean supporters in Japan. In addition to its review of the measures themselves, which subsequently has become well-plowed ground, Annex IV provided comments by several DPRK officials about the origins of the reforms.

Officials “repeatedly stressed that reforms had been under consideration for a long time and are being undertaken to increase both production and profit.” They acknowledged that some of the reform elements benefited from lessons learned by study delegations sent overseas to developed countries. Officials also made it clear that both this overseas learning effort and further reform adjustments would continue as the government applied the “principle of profit” to the economy.

One of the most intriguing revelations conveyed in Annex IV was a statement attributed to So Chongsik, vice director of the European Department, Ministry of Foreign Affairs. At a briefing on the reforms, he told representatives of UN agencies and European countries that “this objective (or reform) will only be achieved by removing the last ‘vestiges’ of the Soviet system from the DPRK economy.”[2]

A Hidden Agenda?

Viewing the entity of reform measures through the prism of this statement suggests a slightly different hypothesis about what the North Korean regime may be trying to achieve. It is possible that this statement refers to the eventual abandonment of planning as the fundamental mechanism for regime control over the direction of the economy. This is possible, but not likely. Planning is indispensable for allocating sufficient resources to fund the DPRK’s huge military burden. Planning presumes the overriding superiority of Kim Jong-il’s choices, and it provides for accountability in meeting the objectives he sets. Moreover, the briefing on reform provided the Chosen Soren made reference to the formulation of a new, realistically formulated economic plan. The regime most likely wants to revive planning and improve it, not abandon it.

The real intent of reform may be found in the punch line of an old East European joke: when asked by visitors from the West to explain how the Communist system operated, a factory employee replied, “We pretend to work, and they pretend to pay us.” The Soviet system imposed on North Korea during the 1940s and 1950s broke the link between work and reward. It destroyed incentives. In North Korea, much of the tinkering undertaken over the years was designed to make the system work better and make workers and managers care about their performance. In the mid-1990s, the regime even introduced some modest incentives: the availability of a reward was announced as “payment for labor in addition to the basic living expenses to those groups or individuals who overfulfill their economic plans and bring about more surplus for the country.” With the standards for extra compensation set so high when economic troubles were so extensive, few rewards were likely paid. The regime in fact continued to pursue its traditional practice of appealing to patriotic sentiment, and it couched its exhortations in militaristic phrases such as speed battles, revolutionary struggles, and arduous marches. But officials have campaigned too long and too often, and ears have grown deaf to their appeals for more sacrifice.

In North Korea, life chances traditionally have been dependent largely on an individual’s family and social- class background, not on accomplishments. Society is divided into 51 groups arranged into three classes. These classes are assigned various labels: some observers identify them as core (30 percent), basic (50 percent), and miscellaneous (20 percent); other observers refer to them as preferred, ordinary, and undesirables or, more descriptively, as core, wavering, and hostile. Helen-Louise Hunter, in fact, chose to open her sociological study of North Korea with a discussion of songbun, the class status that determined where one lived, whom one could expect to marry, where one worked, and how much education one could expect to receive.[3]

One of the principal objectives of the regime’s dramatic adjustment of wage and price structures, removal of subsidies, and change in managerial policies in agriculture and industry may have been the restoration of effective material incentives. The role of money has expanded substantially over the past decade, and reforms legitimize those changes. The new pay and price system, the monetization of consumption, and the decade-long development of consumergoods markets is over the longer term eroding the carefully engineered foundation of North Korea’s rigid system of social stratification and is fostering the development of a social structure in which money counts.

Mr. Newcomb is a senior economist at the U. S. Department of State; the views expressed in this article are his own and do not necessarily reflect those of the Department of State or the U. S. Government.

1. Humanitarian and Development Working Group, “Economic Changes in the Democratic People’s Republic of Korea,” paper no.4, in Consolidated Inter-Agency Appeal 2003: Democratic People’s Republic of Korea (Geneva: UN Office for the Coordination of Humanitarian Affairs, November 2002), 127,

2. Ibid., 131 (emphasis added).

3. Hunter, Helen-Louise, Kim Il-song’s North Korea (Westport, Conn.: Praeger, 1999).