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The Peninsula

Kim’s post-Singapore Economy—Something from Nothing Isn’t Working

Published December 21, 2018

By William B. Brown

Presently, the imperialists are relentlessly clinging to ideological and cultural infiltration maneuvers to destroy our socialist system. … Even though currently everything is in short supply and a penny of fund is so precious…The road to revolution … is absolutely not an easy road. Without the conviction of optimism … one cannot overcome mounting difficulties and will be easily bent by a trivial trial. 

– Rodong Sinmun, November 28, 2018.

“Our greatest duty today is to build a powerful economy. We must boldly wage war to increase production and creativity,”

– Nodong Sinmun editorial, December 18, 2018

Washington pundits seem to think Kim Jong-un has won the higher ground in a zero-sum game against the United States, with time on North Korea’s side. It might be true, but I suspect this perspective would come as a surprise to the conflicted young marshal whose Worker’s Party is voicing tough times even as he promises prosperity.  Not that he is ready to cave on de-nuclearization, but he might be having nightmares of a disgruntled Party reeling from tough sanctions that are aggravating a broken command economy that still lingers and undergirds the entire political system.  Use of money, including lots of US dollars, and private incentives are improving economic performance, but are likely threatening the structure of the state and the livelihood of millions of workers who remain on the old rations-based system.

An example comes from Daily North Korea which last month cited Party stalwarts, policemen, teachers and others in rural provinces leaving their jobs to work in markets, the latter causing consternation among parents concerned about leaderless classrooms.  The problem is quite evident.  Policemen and teachers are among the millions of workers still in the planned or rationed economy system.  As in a conscript army, or in slavery, money isn’t supposed to be important as long as essential goods and services are distributed by ration via state authorities who make procurements through the central planning mechanism.

A school teacher is in the educated elite, and well thought of, but her income is small potatoes, literally.  Fifteen kilograms of rice a month and a few potatoes, sufficient for her family perhaps, but only 3-5,000 won per month in cash. This might be adequate for some clothes in the education department’s low-priced ration store but won’t even buy a cup of coffee in the new markets that have sprouted all over.  With 8,200 won needed to buy one US dollar, and two US dollars needed to ride a taxi, probably one driven by an entrepreneurial soldier, a school teacher or similarly paid policeman can hardly participate in the growing market economy, unless they neglect their official jobs and work privately for real pay.

Estimates of private earnings vary but construction day workers, for example, are reported to earn about 20 Chinese yuan a day (or about $3.00), enough for an occasional taxi or cell phone payment.  And in a non-state textile factory that exports its product, a worker can legally earn 30,000 won per month, or about $40, but without the state rations. The socialist part of this bifurcated system has never worked well but has lingered on in North Korea even decades after a major famine pushed perhaps half the population off rations and into a poorly regulated and often illegal market economy, using all kind of monies as currency.  Now it is that economy that is growing as the state economy falters, no doubt troubling the regime’s stalwart Marist-Leninists. Loyal and ambitious party officials, and the military, as well as school teachers and policemen, must be fuming when they can’t afford $100 cell phones even as the children of lowly merchants flaunt theirs in Pyongyang streets.

Without data it is hard to get an accurate sense of how well or poorly the aggregate North Korean economy is fairing right now.  It doesn’t appear to be progressing in the way Kim promised last April, just before meeting President Trump, but neither is it collapsing in any obvious way.  Partner country trade data, although clearly biased to reflect official compliance with sanctions, would indicate the UN sanctions are very tough, with most countries showing no trade and the lone significant partner, China, showing imports from North Korea down 89 percent in the year through October.  Official exports to North Korea were down 37 percent over the same period with Chinese surpluses, North Korea deficits, running steady at about $200 million a month.  And even this excludes capped but otherwise not sanctioned crude oil that China apparently gives North Korea. [i]  Despite the large trade deficit, price data shows the monetary system to be stable, suggesting large inflows of services incomes, transfers, or much larger smuggled or otherwise off the books North Korean exports than imports. (Note—much of the anecdotal reporting on smuggled products are of imports to North Korea, not exports.)  And, a much bigger headache for Kim, likely extremely tight domestic monetary and fiscal conditions that are holding the won closely pegged to the U.S. dollar.

Still, the price stability as shown in reports from defectors and others is impressive. Imported fuels, especially gasoline, are very expensive but generally stable and fuels seem to be in high demand from a growing private transportation sector. Food prices are stable despite what South Korea estimates as a 3.4 percent drop in grain production this year – rice up 0.5 percent but corn down 10 percent, due to poor weather and lack of fertilizer, some of which is normally imported.[ii]  The International Food Organization also separately estimates a poor harvest, saying North Korea needed 647,000 tons of imported food in the 2018 crop year (Nov ‘17-Oct ‘18), compared to 457,000 tons needed in 2017.  How much of that need has been fulfilled is not known but there is little sign of grain exports to North Korea from the many countries that report such data to the UN.

Consumer goods and grain still find their way across the border from China, paid for with Chinese yuan or US dollars. These purchases despite stiff Chinese sanctions on imports from North Korea that should be drying up the Korean supply of foreign cash. Here, Chinese crude oil no doubt helps Mr. Kim. Beyond the fuel itself, government-owned Ponghua refinery (known officially as Ponghua chemical)  sells refined products in the domestic private market, sucking up currency that can help manage price levels.  Premier Pak Pong Ju publicly visited Chinese-supplied Ponghua, just a few weeks ago, interesting given the theme of self-reliance in the face of “imperialists’” sanctions (presumably including China.) [iii]

So, what is Kim thinking, promising economic advancement while dangerously raising popular expectations and toys with new summits with Moon, Trump, Abe, and Putin?  The economy is still first, at least according to a Nodong Shinmun editorial on 18 December and there are no hints of renewed militarism or nuclear tests. [iv]  And there are some hopeful signs of economic reform, reforms that would improve private property rights, especially for family farming and productive capital that could put North Korea on a Chinese reform track.  North Korean visitors to China and Vietnam, for instance, are studying such reforms and, according to some sources, are using the officially censored “reform” terminology.  And private activity even in real estate is expanding rapidly with urban entrepreneurs building private houses in the countryside, on collective land.  Simple but huge changes in electricity pricing might be coming, which would bring great economic value but devastate fixed-income state workers.

Kim’s public messaging remains stridently conservative, tending to cycle between three legendary North Korea themes—the country can prosper by working harder, working smarter through science and technology, or by increasing self-reliance, that is “don’t buy Chinese goods”.[v]  [vi]All might fit in the “something for nothing” school of economic policymaking, or in the economist’s narrative of asking for a “free lunch”.  Achieving growth by doing nothing different than one’s father or grandfather would require some magic.

So, Kim spent the summer months after Singapore visiting industrial and service facilities around the country, challenging their management to work harder and smarter in turning out goods for the public, and castigating poor management performance.  These continue but the propaganda program now has turned somewhat from the “work harder” emphasis to the “work smarter through science and technology” approach, long the favorite soundbite of socialist dictators struggling to resist capitalist incentives.  And, increasingly, the woes of the world’s “blockade” on pitiful poor Pyongyang are being advertised as pressing the country to move even further to self-reliance, and as likely excuses for delayed prosperity.  And instead of foreign investment, highlighted during the Singapore and Moon summits, the country’s own scientists now are being challenged to invent technology, the absence of which is seen as the reason behind North Korea’s poverty. [vii]

While nothing in these messages really differ from those during Kim’s father and grandfather’s rule, there does seem to be a new willingness to admit to the dire poverty of North Korea and, by implication, the failures of these long-held approaches. An optimist might even think this is all setting the stage for major new reforms that could provide the proverbial free lunch. A North Korean scholar, for instance, recently provided Nikkei News and Associated Press with an estimate of the country’s GDP in 2017, $30.704 billion, up from $24.998 billion in 2013 and $29,595 billion in 2016.  The genesis of the figures is a mystery as North Korea publishes no supporting information or data, not even NK won based information.  The scholar’s immediate intention was probably to try to generate a more positive story of GDP growth, a rise of 3.7 percent in 2017, instead of a 3.5 percent fall as estimated by South Korea’s Bank of Korea.  But the level of GDP growth is improbable.

“Live our own way” is the mantra proclaimed last week by the All Korea Worker’s Party Seminar in Pyongyang, echoing Kim’s father, Kim Jong-il.  Is that the message the young marshal wants to give his absentee teachers and policemen? Maybe not.[viii]

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Footnotes

[i] Chinese Customs, as provided through Global Trade Atlas.

[ii] Yonhap in English 0219 GMT 18 Dec 18

[iii] KCNA in English 0954 GMT 12 Dec 18

[iv] Hankyoreh Online in English 0802 GMT 18 Dec 18

[v] KCNA in English 1454 GMT 13 Dec 18

[vi] Rodong Sinmun in Korean 0611 GMT 05 Dec 18

[vii] Rodong Sinmun in Korean 06 Dec 18

[viii] KCNA in English 1454 GMT 13 Dec 18

Image from Wikimedia Commons via Flickr account of Russavia

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