Growth isn’t necessarily good news for Kim Jong Un

Byung-Yeon Kim, a professor at Seoul National University, began interviewing North Korean defectors seven years ago to learn more about their country’s economy. One wouldn’t have thought there was much to discover: Often described as “Stalinist,” the hermetic regime to the north seemed to preside over a crude, centrally planned system, with peasants toiling away for a pittance in collective farms and state-owned factories, dependent on food aid and growing poorer with each passing year.
In fact, as Kim lays out in his new book “Unveiling the North Korean Economy: Collapse and Transition,” that popular image is almost entirely wrong. By necessity, virtually all North Koreans, from farmers to army commanders, now buy and sell goods and services in capitalist markets—whether to survive or, in some cases, to get rich. The economy is growing and wages are rising; until recent rounds of United Nations sanctions, North Korea was about as dependent on foreign trade as the UK or Italy.
This will come as a disappointment to those who hoped that popular discontent would spell the end of the North Korean regime; despite decades of isolation, the country has stabilized economically even as it rapidly develops its nuclear and missile arsenals. Kim is more sanguine: He sees the spread of markets and money as a threat to dictator Kim Jong Un—and a point of pressure that the outside world can exploit. We spoke last week soon after North Korea tested its first thermonuclear device but before its latest missile test flew over Japan. A lightly edited transcript:

How has the North Korean economy changed under Kim Jong Un?
Since Kim took power in 2011, the economy has stabilized. While the rate of growth isn’t that high, overall the economy has grown 1 to 2 percent for the last five years.
It’s not really a Stalinist economy anymore. North Korea experienced a severe crisis in the late 1990s, when several hundred thousand people starved to death because of famine. Afterwards, the economy changed dramatically. Before, the regime repressed any kind of market activities. But nowadays, households participate more in the informal economy than the official economy. About 70 to 90 percent of household income comes from markets.
The reason is quite simple: The government cannot pay a salary sufficient to live on. I talked to one high-ranking diplomat who served in London and defected to South Korea last year. He said that he received a monthly salary of 2,000 North Korean won. At that time, the market rate was 3,000 North Korean won to the dollar. A typical North Korean household needs $50 per month for survival; the remaining part of this need is filled by markets. Some 70 percent of households participate in markets, while only 50 percent participate in the official economy. It’s a hugely informalized or marketized economy.
Second, North Korea is not a closed economy anymore. I estimate the economy’s trade dependency ratio is higher than 50 percent. The world average is 58 percent.
Critics argue that sanctions won’t work because North Korea is largely self-sufficient. But they really do need trade to survive.
Exactly. Trade and the markets are a double-edged sword. The markets function well, but they also expose North Korea to a potential external shock, through trade.
More than 70 percent of consumer goods are imported from China. These transactions require foreign revenue and this revenue comes from trade. So when trade is hit, markets can be hit hard as well. Then the two pillars that sustain the system may collapse.

Can we see any signs of this happening?
Not yet. When you look at market prices in North Korea, they haven’t moved. Trade has been hit hard: China stopped importing coal for much of this year, so exports from North Korea to China declined by 25 percent for the first half of the year. But imports have increased. That means consumer goods and food are still coming into North Korea through China.
We know that some North Koreans are rich. We know that rich and middle-class North Koreans have some savings, so therefore they can spend this money. But if imports exceed exports this year and next year, then I would expect possible balance of payments problems because their foreign revenue earnings will be insufficient to sustain imports.

Does the opening of the North Korean economy reflect a conscious decision by Kim Jong Un to reform, as China’s Deng Xiaoping did?
Kim Jong Un is wiser than his father Kim Jong Il in managing the economy. The major opening took place in the 1990s and it was forced upon North Korea by the food crisis. But Kim Jong Il believed that markets were bourgeois and, in 2009, he tried repressing them through currency reform. He introduced new currency bills and imposed a ceiling on how much each person could exchange; those who had more money than the ceiling were unable to exchange it. But the scheme was a drastic failure. [To address public fury], one high-ranking official was shot and the prime minister apologized to the public.
Kim Jong Un may have thought, “O.K., repressing markets may not be possible because today, without markets, people will not survive. So although I don’t like markets, without markets I cannot maintain my power.” So that is some kind of endorsement, but it’s a forced endorsement. Market activities are now tolerated and there are no harsh penalties for engaging in them.

But Kim isn’t pushing forward and implementing reforms that would expand markets or improve their functioning?
No, I don’t see any clear indication that market reforms have been institutionalized. For example, China began reforms in 1978 by instituting the household responsibility system: Households were allowed to cultivate their land, give some part of the yield to the government and sell the rest in markets. A similar kind of reform was introduced in North Korea, but we don’t have any firm information about whether the reform applies to all collective farms, or was a kind of experiment. If you look at the figures for agricultural production over the last four to five years, they’ve increased but they haven’t increased as much as in China. That means that even though they’ve experimented with this kind of reform, it’s been a rather partial, cautious reform. The same applies to markets.

— Bloomberg

Nisid Hajari writes editorials on Asia for Bloomberg View. He was managing editor and foreign editor of Newsweek magazine, as well as an editor and writer at Time Asia in Hong Kong. He is the author of “Midnight’s Furies: The Deadly Legacy of India’s Partition.”