Can Mickey Mouse Reform North Korea?

October 8th, 2012
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Disney characters dancing around on stage, women wearing pants and platform shoes; farmers (reportedly) allowed to keep and sell their product in private markets, a once powerful Vice Marshal removed from the ranks, and the right-hand man of the regime sent to China. In recent months, the signs that reform is afoot in North Korea have become so great that even the most jaded North Korea watcher must take notice. But while these changes may seem trivial while an estimated 200,000+ still languish in North Korean gulags, some hold real promise if the North Korean regime is actually serious about reform.

Previous Attempts

Talk of reform in North Korea is nothing new. The question of when the regime would finally admit its failures and follow in the path of China has puzzled analysts for many years. Yet the regime has been able to muddle through, despite a stagnant economy and sanctions imposed as a result of their nuclear program. In part this has been the result of Chinese aid and trade, but mostly this is a story of what Stephan Haggard and Marcus Noland of the Peterson Institute call “bottom-up marketization.”

During what would become one of the most devastating post-war famines on record, many in North Korea realized that they could no longer rely on the state to survive. Markets (called the jangmadang) began to sprout up where food and other goods were sold illegally. The regime largely turned a blind eye to this development until 2002, when much of it was essentially “legalized.” These reforms also increased the state price of grain to near market levels while also increasing wage levels for state employees, and introduced limited incentives in the industrial and agricultural sectors.

While reforms like these were seen as a major step forward, the regime began to sour when they started to succeed – largely because, as The Daily NK journalist Chris Green points out, the state’s power was waning even further. By 2005, much of what had been instituted was rolled back and the formerly moribund Public Distribution System was revived. In 2009, the regime launched a “currency re-denomination”  which was a two prong assault on the ill-begotten wealth from the markets and attempt to limit the increasingly powerful merchant class. The amount of North Korean won that could be traded in for the new currency was sharply limited (only a few month’s salary) and essentially punished traders and market-workers for making too much money. However, this move seemed to backfire, and produced social discontent on a level previously unseen in North Korea, leading to some relaxation in terms of how much won could be traded in.

Reform under Kim Jong Un?

Since Kim Jong Il’s death in December, the signs that North Korea was considering reform had become increasingly apparent. While a recent meeting of the Supreme People’s Assembly disappointed many North Korea experts by not detailing these reforms publicly, the fact that it met for a second time in one year was unusual and perhaps indicative that economic reforms was in fact discussed.  But now thanks to the Daily NK and other defector sources, a clearer picture has developed of what reforms might look like. (Note: As with anything involving North Korea, caveat emptor!)

Agricultural reforms, called the “6.28” policy, revolve around a few basic changes:

  • Reducing the basic farming units to 3-4 members (some reports say 6-8) from around 10-25 currently, essentially making them into family-based units (increasing incentives for production).
  • The state paying a market-price, as opposed to the much lower price currently being paid, for its production quota, although it will also deduct for the inputs.
  • Allowing farmers who produce more than their quota to do what they want with the excess production.

Similar to what was undertaken in China in the late-1970s, the hope behind these reforms is that the regime will increase the incentives for growing by allowing farmers to sell more on the private market. In China, this led to an explosion of output and eventually drove reform in other sectors. The same could be the case in North Korea, though as Marcus Noland remarks, agriculture’s smaller share of the economy (35% of the population versus 70% in China at the time of reforms) means the effect will also be reduced.

Industrial reform has also been widely discussed. In addition to allowing individuals to engage in private investment, reports have also emerged that North Korea is planning to introduce “full-scale cash-payment system for transactions among light-industry state firms” which allows these firms to “determine its production items, price and selling methods.” There are further signs that a number of failing enterprises, which produce little of value and remain a burden for the government, will be closed or merged with more successful ones, representing a modest step towards State-Owned Enterprise (SOE) reform. On the propaganda side, we have seen positive mentions of “entrepreneurs” and economic news pushing the activities of Kim Jong Un to page two in Rodong Sinmun (the Workers’ Party official newspaper).

Lastly, there have been further moves to expand the economic relationship with Russia and China, especially with regards to the Special Economic Zone (SEZ) at Rason. Reports that Jang Song Thaek spent most of his recent visit to China discussing the Rason SEZ and Hwanggumphyong and Wihwa Island SEZ suggests there will be continuing high-level support for these projects, in contrast to past support which was tepid at best. However, the investment climate in North Korea is still very poor, and Chinese companies have been burned a number of times (see the Xiyang case for example). If North Korea is serious about economic reform it will have to make it easier and more attractive for companies to engage in joint ventures, and also guarantee that their investments will be secure.

Failure, Collapse or Success?

Taken together, these moves appear to be steps in the right direction. However, the ultimate outcome is far from clear. Among the possibilities, reforms could fail outright or be rolled back (as was the case in 2002), cause regime instability, or lead North Korea to become the next China or Vietnam, two countries that successfully implemented economic reforms while maintaining one-party rule.

One thing that casts doubt on the successful implementation of these reforms in the short term is the reported discussions regarding price controls and wage increases. Similar measures were implemented twice in the past – 2002 and 2009 – and in both cases they catalyzed enormous bouts of inflation, and were a major cause of failure for both reform and currency re-denomination.

In fact, according to Noland, inflation has already increased by an annualized rate of 1000% over the past three months, which would only be exacerbated by these proposed measures. The price controls also cause problems in the markets because traders often refuse to sell at below market prices. These problems would lead to concerns about social stability and a push to rollback reforms. In addition, there is the underlying concern that even if reforms show some nascent success, a reported poor harvest this year means the government will be tempted to swoop in and take what they need from farmers to ensure the military, security services and other elites have enough rations.

As pointed out last week, the worst sign for reform may be that it was not discussed publicly. The regime missed a chance to send a signal to farmers that this time really was different. Instead, farmers will fear that any excess grain they had hoped to sell on the market will be taken by force, just as the regime has done at least once a decade since their founding.

However, even if the regime successfully pulls off reform in the short-term, it may cause instability in the long-term. Andrei Lankov, a major proponent of this theory, argues that any successful reform in North Korea will entail opening up information flows into the country. At this point North Koreans will be able to see just how great the income gap is between North and South Korea – at least 15-to-1 by UN estimates (and likely higher). This also means that the common comparison of North Korea with China and Vietnam is misleading – when China and Vietnam began their reforms, neither had a “South China” or “South Vietnam” to worry about (Taiwan is too small to count in this case). If North Korea reforms it loses all ideological purpose; essentially, it reveals to North Koreans that their country is a second- or third-rate South Korea. In that case, why should it even continue to exist?

Although the security forces will remain powerful for this very reason, the ability for people to communicate with one another will become easier and the increase in income will also make it easier for regular people to bribe security officials and avoid punishment. These two factors are a recipe for social instability within North Korea that could one day lead to revolution, as seen in Communist countries in the late 80s or the “Arab Spring” countries in 2011/2012.

The more optimistic scenario for reform is that if (again, these are big ifs) the short-term problems are overcome and conservatives convinced to let reform proceed, then Lankov’s fears are largely overstated. B.R. Myers points out that many North Koreans already understand just how rich the South is but, even with a relatively porous border with China (though more difficult to cross than in years past), the number of defectors has never been particularly high and often these defectors come from the poorest and least-propagandized areas of the country. Chris Green and Sokeel Park also remark that the Chinese have presented a reasonable blueprint for co-opting the masses with economic growth without providing an equivalent amount of political reform.

Assuming that North Koreans already know how rich their cousins in the South are, they are likely to be happy that reforms are making their lives relatively better rather than directly comparing their living standards to South Korea. In some minor ways, it may even help the regime; if people become aware of how much trouble most North Koreans have adjusting to life in South Korea, they are more likely to want to make the best out of their current situation. As reforms advance, social control will continue to be a major issue, which likely explains why the the security services now have greater representation on important political bodies (the Minister of State Security and Minister of People’s Security now sit on the Politburo, National Defense Commission and Central Military Commission). Economic reforms will bring in more revenue for the government to bolster these services, although problems related to corruption will also increase.

The above scenario is certainly optimistic because it depends on the North showing a willingness to stick with reform that has not been there previously. However, it is not outside the realm of possibility, and it is a scenario that policymakers should start to grapple with. Ultimately, with improved economic growth, the regime can make a case that it is improving people’s lives, even as it simultaneously boosts the budget of the security and military apparatuses. In that case, the North Korean regime might be able to hang on for far longer than ever expected.