The world has marvelled that South Korea and North Korea have had their first dialogue in two years, paving the way for the North’s participation in the Winter Olympics in Pyeongchang County, South Korea.
But few seem struck by the obvious lesson: a dose of incentives alongside the disincentives of sanctions championed by the US and passed unanimously by the UN Security Council, may well be the policy mix to pursue with Kim Jong-un. Without overstating the impact a changed prescription along these lines might have on Kim’s conduct, it’s hard not to argue that at this juncture the world surely needs to get far more creative in dealing with Pyongyang.
To this end, one area that has a hope of progress is for the US and other members of the Security Council to support economic reforms that give life to North Korea’s nascent private sector. Indeed, this change in therapeutic approach could be just what the doctor ordered.
It will shock most readers to know that North Korea already has a private sector, albeit of limited scale and scope. As best as those of us who assess such things can tell from the paucity of opportunities for first-hand observation in light of Pyongyang’s political regime.
And, these businesses have begun to grow materially over the last decade. Arguably, they may well be ripe for nurturing.
Ironically their genesis was the collapse of the Soviet Union’s trade regime and the opening up of China in the early 1990s. Both countries had been the substantial supporters of, and engaged in trade with, North Korea. But such trade was carried out on terms that explicitly and implicitly provided subsidies to Pyongyang.
As Moscow’s and Beijing’s reforms inched towards market principles, including entering into bona fide international trade transactions with capitalist countries, their appetites toward - and the capacity of providing - these subsidies abated.
As the purveyors of fertilizer, chemicals and farm machinery to North Korea, their pullback set the output of North Korea’s agricultural sector into a tailspin. This engendered unrelenting strain on Pyongyang’s archaic centralized system for physically allocating existing foodstuffs to the population through the use of ration cards to stringently regulate access to state-owned distribution centres and stores (where extraordinarily low nominal prices were charged).
The ensuing famine throughout the mid to late 1990s was horrific, with the death toll estimated to be as high as 13 per cent of the nation’s total population of 20-plus million. The state blamed the famine on floods (the existence of which to this day is questioned) and refused to acknowledge its own inability to provide for its citizenry. Pyongyang’s illusion of economic “self-reliance” was perpetuated for years... and largely remains so today.
Out of desperation, small-holding individual and family growers began to appear — using fields often, though not always, out of public view — with any surplus sold to others. Barter exchanges and small open-air markets arose, where anything of value was sold, including parts of machinery and the like stolen from factories in which they “worked”. Smuggling along the Chinese border blossomed.
Local government officials turned a blind eye to virtually all of such non-state, i.e., private, activity in return for bribes. In fact, the state refused to acknowledge the existence of private enterprise — the official stance of Pyongyang.
In time, especially in the early 2000s, these micro “enterprises”, barter exchanges and shuttle traders earned surplus revenues, which prompted the search for investment opportunities across the country. The result has been the rapid emergence of small to medium-sized workshops producing clothes and household products; larger factories manufacturing fabric, building supplies, tools and machines; cafes, restaurants, hotels, and private apartments; fisheries; provision of transport services, including the ownership of trucks, buses and cars; and foreign trade enterprises.
Kim Jong-un’s father, Kim Jong-il, had little choice but to recognize that the “shadow” private sector had become the growth engine of North Korea’s economy, and up until 2004 actually instigated limited reforms to explicitly encourage it.
However, as the surpluses generated by the non-state sector ballooned, evidenced tangibly by “conspicuous consumption” but little in the way of formal tax payments to Pyongyang, Kim Jong-il reversed course and not only applied administrative and legal restrictions curbing the private sector, but in 2009 also instituted currency reforms.
These actions actually had little effect on the moneyed-class, but depleted savings of much of the rest of the population, fomenting broad hostility. By the time of his father’s death and the start of Kim Jong-un’s rule in 2011, these constraints were largely lifted.
Yet Pyongyang refused to acknowledge officially the presence of the private sector. That policy largely remains in effect today.
With an official stance of non-admission of the existence of the private sector, it is truly impossible to know with any semblance of accuracy its contribution to the country’s economy today. Indeed, Pyongyang itself may have only the roughest of ideas.
The best educated guesses based on select case studies by outsiders point to a wide range of the role of the private sector, approximately 30-60 per cent of North Korea’s GDP.
The one area of the economy, however, Kim Jong-un simply cannot pretend the private sector does not play a critical role, is the country’s need to increase its integration into global trade. For two mutually-reinforcing reasons.
First, he knows private sector-led trade, especially its ability to earn hard currency, lies at the heart of his rule, inasmuch as North Korea chronically runs a significant trade deficit (although in recent years it is far smaller than it was in one-and-a-half decades).
But second, and doubtlessly far more important to Kim personally, is that robust international trade — which in the case of the North Korean economy can only be propelled by its private sector — feeds his psychological craving for global stature.
The writer is on the faculty of Johns Hopkins University as well as CEO and Managing Partner of Proa Global Partners llc, an emerging markets investment transaction advisory firm.
