A spate of recent news articles has highlighted the efforts of everyday North Koreans to earn a living by engaging in market activities. Adam Smith would easily recognize this as the beginnings of a free-market economy and Charles Darwin would point out that this is survival of the fittest. Even though these nascent undertakings show great promise for the North, they also face some serious obstacles. Nonetheless, given the now-obvious entrepreneurial spirit of a few bold individuals, it is possible to have have some hope that capitalism can advance from the tiny toe hold it currently has in North Korea.
The ‘more’ that is needed is massive national – or at least regional – infrastructure
Before the celebrations begin, though, let’s take stock of the current situation. There has been a report about a few donju trying to control their respective markets by eliminating the middleman through acquiring the equipment necessary for food production and processing. Even though this is expensive, the intent of course is to increase profit by vertical integration. This may indeed bring about a modest upturn in net gain, but more is needed than just the purchase of costly equipment to achieve the best possible return on investment.
The “more” that is needed is massive national – or at least regional – infrastructure. To process goods like grains, meats and vegetables, all relatively easy to prepare for marketing, some type of processing facility is needed. Admittedly, a plant does not have to be large at the start, but any business needs a place in which to prepare its goods.
Once a place has been established, the business requires a source of power to run the machinery involved in production, or even if processing is done manually, then heat and light are needed at a minimum. The more efficient form of energy is electrical power, though coal is sometimes used as well in North Korea. A costlier way to develop electrical power is through generators running on diesel fuel or gasoline. Regardless of the source, processing requires a form of power.
And once products are ready, they must be distributed to markets; roads are essential and some method of transportation is required. By roads, I mean what most in the free world take for granted: the seemingly endless ribbons of concrete or asphalt that are in more or less adequate condition so that goods can be transported from Point A to Point B in vehicles with relative ease.
Presently, it would not be an exaggeration to say that North Korea has almost no infrastructure. Nearly all factories are state-owned or state-sanctioned, and many of those have been cannibalized for parts or are rusting from disuse. Further, even the elites of Pyongyang do not have reliable electrical power. Diesel fuel and gasoline are not abundantly available, and with sanctions, those meager supplies may become even scarcer. Moreover, nearly all roads outside of major cities are unpaved and poorly maintained.
According to the CIA World Factbook for 2015, the North produces only 21 billion kilowatt-hours of electrical power annually. By comparison, South Korea generates more 485 billion kilowatt-hours annually, 23 times as much. Other comparisons are noteworthy as well.
North Korea has only 450 miles/725 kilometers of paved roads out of a total of just 15,000 miles/24,500 kilometers for the entire country. The South, which is one-sixth smaller in area than the North, has 64,000 miles/105,000 kilometers of roads, four times as much with 83 percent paved. Moreover, private ownership of vehicles in the North is not common and inter-city private shipping is accomplished by mostly ad hoc arrangements. In contrast, vehicles of all types exist, fuel is abundant, and shipping is hardly ever an issue in the South.
Additionally, Pyongyang can boast only 3,200 miles/5,250 kilometers of rail lines – and its trains do not operate dependably for a variety of reasons. While Seoul has only slightly more track laid, its trains do run as scheduled.
All of these factors combine to severely restrict production in the North. Goods therefore are limited to whatever area can be covered by bicycle, ox cart or rudimentary truck over rough roads. In many cases, this means products, whatever they might be, get only local distribution, and there is little opportunity to improve this situation.
Factories are needed, yet erecting buildings these days is a risky endeavor
In order for donju capitalism to survive and flourish, a modern infrastructure must be built. This includes heavy industry projects like dams for hydroelectric power generation – but such projects must be accomplished with careful attention to engineering standards and certainly not constructed at Kim Jong Un’s dictated speed.
Factories are needed, yet erecting buildings these days is a risky endeavor, given the number of collapsed structures lately – and the private sector likely does not yet have the capital for such expensive projects anyway. However, there are state-owned factories that have been abandoned due to lack of power, depletion of machinery sold on the black market, or are simply rusting away from lack of maintenance. If deals with the state could be struck, perhaps these existing buildings could be renovated and then repurposed for leasing to entrepreneurs.
Development of a distribution system is a huge challenge, and the difficulties of dam construction also confront the creation of highway systems and other surface roads. Nonetheless, for capitalism in the North to develop fully, raw materials must be easily procurable and finished goods must be able to reach beyond the local area. As different suppliers and producers go into new markets, competition will certainly increase and only the better and cheaper materials and products will survive.
THE PROBLEM WITH THE SOLUTION
Everything comes down to money. Infrastructure done properly is enormously expensive, but money on that scale is non-existent in the North of today. Building the number of dams needed to supply the required amount of electricity is an intimidating endeavor. Paving hundreds, if not thousands, of miles of roads is equally daunting. The emerging merchant class is not up to the task, and unfortunately neither is the government.
The regime has neither the expertise to have these massive projects done by slave labor nor the financial wherewithal to contract out such endeavors. North Korea does not even have the ability to pay qualified laborers with goods-in-kind: the state Public Distribution System, responsible for distributing food rations to its citizens, is all but defunct. No one wishing to eat relies upon it anymore.
Some sort of Plan B is needed, and one possibility is to seek outside investment, undeniably a risky commitment of money by any entity choosing to do business with the North. Further, there are various political constraints and international sanctions that act to discourage if not outright prohibit such endeavors. It is next to impossible for any foreign company to engage in such projects inside North Korea these days.
Even if such projects were permissible, the question then becomes whether they are practical. Pyongyang does not have a confidence-inspiring record of dealings with outside investors. For example, the Egyptian telecommunications company Orascom is experiencing great difficulty repatriating its earnings from collaborating with the North in developing its mobile phone network.
South Korean projects such as the Diamond Mountain Resort on the southeastern coast of North Korea was closed and all investment lost when a North Korean soldier killed a South Korean tourist. More recently, Seoul abandoned its Kaesong Industrial Complex just north of the DMZ after a number of provocations by Pyongyang. Even the Chinese are wary of business ventures in the North.
Sanctions will have to be removed and conditions in North Korea will have to improve substantially before most Western capitalists will consider investing in North Korea. Until then, the donju will have to continue with their own brand of entrepreneurial spirit in the face of adversity. Let’s wish them luck in overcoming these considerable obstacles.
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Featured Image: Fruits stall in a street market Pyongyang - North Korea by Eric Lafforgue on 2008-09-08 14:55:34