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The Peninsula

Why North Korea Isn’t Interested in Economic Reform

Published April 8, 2013
Category: Inter-Korean

By Troy Stangarone

As often happens with North Korea, there have recently been suggestions that the regime may be interested in engaging in economic reforms. The latest hopes spring from the appointment of Pak Pong-ju, a noted economic reformer, as prime minister and the replacement of most ministers of industry with officials believed to have been part of a task force established by Kim Jong-un to revive the economy. In conjunction with the appointments, Pyongyang announced a dual track policy of building the economy while also enhancing its nuclear weapons program. However, it would be premature to assume that these are true signs of a potential economic opening.

For years, the Chinese have been encouraging the North Koreans to follow their path to reform with little success. After the passing of Kim Jong-il, there were hopes that Kim Jong-un would embrace reform. Shortly after taking power, he remarked that North Koreans should “never have to tighten their belts again” and later that fall told a delegation from China that he was focused on “developing the economy and improving people’s livelihoods.”

However, in contrast to North Korea’s pledges to conduct this past December’s satellite launch and their third nuclear test, there has been relatively little follow through on the economic side. Over last summer and fall, expectations built that North Korea would engage in limited industrial and agricultural reforms. When North Korea announced that it would convene its parliament last September, there were hopes that it would announce economic reforms designed to introduce incentives for producers to increase   production and allowed select factories more say in what they produced and how. If successful, the reforms would be spread to the whole economy.

At the same time, North Korea mooted the possibility of agricultural reforms. A small number of farms would be allowed to sell portions of their harvest in markets. If successful, the experiment would be spread to the rest of the agricultural sector. However, the test cases did not take place, as harvests disappointed and feeding the military was seen as a priority. At best those reforms have been put off, if not shelved completely.

The prospects for current reforms also look doubtful. Shortly after announcing its new economic policy and shuffling cabinet officials, North Korea proceeded to close the border with South Korea and prevent the flow of goods and people into the Kaesong Industrial Complex.  While the tactic is not new, it is also not the step of a regime that takes economic development seriously.

Further complicating the situation at Kaesong, North Korea announced that it “will temporarily suspend the operations in the zone and examine the issue of whether it will allow its existence or close it.” This additional action, if North Korea follows through, is unprecedented. The current border closing had already forced at least 13 South Korean businesses to suspend operations, and if North Korea follows through and removes its workers, the other 110 companies located in the industrial zone would also have to suspend operations.

While all of the South Korean businesses operating in Kaesong face short term losses, North Korea’s actions could also impact the long term prospects of the industrial zone and its own economic reform measures. Businesses, especially the foreign investment that would be needed revive the North Korean economy; require stability and assurances that their access to goods and services will not be cut off at the whim of the government.

Prior to the announcement on Kaesong, there had been speculation in the South Korean press there were divisions within the regime on what steps to take next, with the press reporting that the military was strongly pushing for Kaesong to be closed, while the party supported maintaining the complex. Even if this is not the case, Pyongyang’s actions at Kaesong cast doubt on the prospects of there being a consensus to move towards reviving the economy in North Korea.

Additionally, Pyongyang’s unfriendly business policies do not just extend to South Korea. While North Korea has an investment law in place, it does not always apply even to its allies. Last fall the Chinese firm Xiyang Group went public with its story of being cheated out of a $37.1 million investment in North Korea. It claims that it is but one of dozens of Chinese firms that have experienced similar problems. Efforts at developing an industrial complex similar to Kaesong along the Chinese border have also been slow moving.

If North Korea is to take substantive steps to revive its economy and move towards normal economic growth, it will have to move beyond taking arbitrary and capricious actions. It will need to move towards the rule of law, which at the same time would constrain the power of the current regime. This would allow markets to take hold, for which the regime would have to commit to refraining from actions such as the 2009 currency reform that was designed reign in the markets and reduce the profits made by traders. The regime will also need to accept the development of alternative centers of power as lower and mid-level functionaries in the regime, and over time those not associated with the regime, acquire wealth and influence through their business ventures. This would also require Pyongyang to move beyond its tactics of using escalating tensions to illicit aid and concessions from other nations.

Under Kim Jong-il, these were steps the regime was unwilling to take for fear of suffering the same fate as the communist regimes of Eastern Europe and there were few signs of the regime being voluntarily willing to loosen its hold on the country. During periods of famine and when the public distribution system would break down the regime would tolerate the emergence of markets, but it also would push to scale them back as circumstances changed. It is unclear if Kim Jong-un and his advisors view the situation the same, but the pattern to date is much like his father’s, military strength is favored over economic reform.

If the regime is still reticent to undertake economic reforms, the recent move by Pyongyang to again stress the importance of reviving the economy may be a tactical move. Having previously written into its constitution that it is a nuclear weapons state and recently announced that its nuclear weapons are the “nation’s life” and will not be traded for “billions of dollars,” North Korea needs a means through which to deescalate the current crisis and a path for future talks with the United States, South Korea and others. If its nuclear weapons are truly off of the table, Pyongyang needs a basis for future negotiations. By restarting its nuclear facilities and offering the prospect of economic reform, North Korea may be trying to establish a baseline for future talks where it offers the prospect of a reformed economy for the price of its nuclear facilities, but not its weapons.

In light of North Korea’s past failures to follow through with real economic reform measures, the recent announcements by Pyongyang should be viewed more as a tactical move than a shift in policy. Rather than hope that North Korea has turned a corner on reform, a more prudent course would be to determine if North Korea follows through on proposed reforms and adjust accordingly. Unfortunately, the actions at Kaesong do not make this look likely. However, if Pyongyang were to implement genuine economic reform measures, the United States and South Korea should be prepared to take actions that would reinforce those reforms.

Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

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