Many scholars of contemporary North Korea think of the country as having undergone a rapid, grassroots and spontaneous transformation from being a state socialist, command economy, to becoming a market economy sometime in the past decade or two. But what is the evidence for this? What is North Korean marketization? And when might it actually have begun?

If we think of the ‘market’ as being simple a ‘marketplaces’ then yes, the accepted narrative that marketization began in the mid-to-late ’80s can be demonstrated to be true. However, if we take a more expansive and technical view of the ‘market’ as a mechanism for allocating goods and services, and also being defined by private property relations, then marketization probably began a lot earlier, as early as the late ’70s.

This relates to the emergence of a new North Korean institution, the Foreign Trade Company (FTC), which was established during the time of high Kim Il Sungism and largely unnoticed by foreign observers until relatively recently. Indeed, the dominant narrative still points to marketization beginning in the mid to late 1980s.

FORMALIZATION PROCESS

Much refugee testimony indicates that from the mid-to-late ’80s, sporadic and itinerant markets – known by such names as ‘Hong Kong markets’ and ‘Grasshopper Markets’ – began to emerge in the northern parts of the country.

These were a trend that gradually spread across the country with the famine of the mid-’90s and general economic collapse. Following their proliferation they was an actual formalization of the market system with the creation of so-called ‘General Markets’ from 2003. Some refugees’ recollections indicate, however, that the latter reform was just a belated admission of the new reality, and did not actually result in major changes on the ground, because the transformation had already happened.

The range of products available and the number of people somehow employed in the pure private sector – be it building, cottage production, makeshift restaurants or haulage services – expanded quickly through this period.

From the mid-to-late ’80s…’Hong Kong markets’ and ‘Grasshopper Markets’…began to emerge in the northern parts of the country

Under socialism markets were previously frowned upon in nearly all socialist bloc countries, and usually restricted to selling food and other consumption goods, with limited hours of operation. In that regard, North Korea had historically been an extreme case, even by Stalinist standards, with markets being closed all together in the 1960s and their operations usually being extremely limited.

MARKET ALLOCATION

Here, however, we should probably briefly discuss by what we mean by ‘markets’.

The word ‘market’ has many meanings, notably including definitions linked to ‘marketplaces’ or ‘stock markets’. But in economic theory, a market is a mechanism by which resources are allocated and distributed between actors, often through a unit of exchange through the ‘price mechanism’. That is to say, the forces of supply and demand determine the price of goods and services.

For such a mechanism to work, it is commonly accepted that productive property – things like land, tools and factories – should mainly be in private hands. One giant state monopoly, which is what state socialism was, cannot therefore be subject truly to the ebb and flow of supply and demand. Thus, to economists, markets are conceptually a means through which resources – everything from raw materials to labor – are allocated. They are also a means by which decisions about the economic future are made.

Under state socialism, however, the market is usually marginal, investment is decided by the state, and in North Korea, most consumer goods were rationed or allocated by the state: bureaucrats decided which production unit got what and when.

Consequently, when talking about the marketization of North Korea we are technically talking about two, related, but separate phenomena.

One is the emergence of marketplaces as an arena in which consumer goods are traded on a for profit basis, with prices being determined by the forces of supply and demand. The other is when we are talking about the breakdown of state control over resources – de facto privatization.

When talking about the marketization of North Korea we are technically talking about two, related, but separate phenomena

It is this second meaning that is important to our discussion here. This is because it seems have gone much further into the state than some might realize, and the process may have begun earlier than widely believed.

PRIVATIZATION: THE REAL BEGINNING

Research that I have done with Andrei Lankov – and two other co-authors, see concise summary summary here – indicates the presence of another phenomenon: ‘pseudo-state enterprises’. These are things like diesel refineries, car services, restaurants, mines and other kinds of businesses that are nominally registered as state organizations, but actually run as private enterprises.

That is to say that the initial investment in capital stock, be it machines, buses, bricks or something else, is made by an entrepreneur and hence much of the profit made by the business goes into private hands, and its day-to-day operations are managed by him or her too.

These investors have to pay for the privileges that they enjoy through such an arrangement – the protection of the state organization they are nominally part of – but this is akin to a franchise fee or tax, rather than the payment of all profits of a State Owned Enterprise (SOE) to the central/local government budget. Investors also have control over much of the profits their businesses generate, making them very different in character from SOE managers.

This is not to say that all SOEs are actually just private franchises run by investors, however. In a recent interview with a refugee who was in charge of a North Korean construction company that did work in the Gulf, it was quite clear that such operations are run as SOEs, though managers and workers are rewarded far more handsomely than those back home working at most SOEs.

But here is the rub: North Korea is a hybrid economy today, with a state sector that has been hollowed out, stripped of many of its assets (for want of capital to utilize them) and with many de jure SOEs now actually being run as private concerns.

The question remains, however, when did this all begin?

Now, you might think that this question has already been answered, being the late ’80s when the ‘grasshopper markets’ started appearing in the northern provinces.

This is the ‘marketplace’ answer, however. But if we think of North Korean marketization as being the introduction of the ‘price mechanism’ and de facto private property, we might have to look back into the past further than the late ’80s.

North Korea is a hybrid economy today, with a state sector that has been hollowed out… and with many de jure SOEs now actually being run as private concerns

OBSCURE BEGINNINGS

In the late ’70s, as Kim Jong Il’s star was rising, a little known, if rather obscure reform was introduced in the foreign trade sector.

Under classical state socialism – such as during the Soviet Union of the early ’50s, and North Korea of the ’60s– all foreign trade was subject to a central state monopoly. In this way, the Ministry of Foreign Trade managed all trade between North Korea and the outside world. Thus while factory managers, regional People’s Committees, collective farm managers, and central economic ministries were, to varying degrees, influential players in the economic planning process, everyday production units had little or no power with respect to foreign trade.

For some reason – perhaps related to Kim Jong Il’s rise to power in the late 1970s – this Foreign Trade ministry monopoly began to be broken up. Gradually, more and more production units and other kinds of state and party institutions were given the right to form what are known as ‘Foreign Trade Companies’ (FTC).

On paper this move was just simple decentralization: the state still controlled all the property, and the only market involved was the international market through transactions with foreign countries. But the FTC concept developed in the 1980s and 1990s into a vanguard institution of marketization, becoming a key buyer and seller of goods for what would become the major domestic markets.

The Foreign Trade Company concept developed in the 1980s and 1990s into a vanguard institution of marketization

Some of these FTCs also eventually came to be run like the aforementioned pseudo-state enterprises. That is to say, their managers were largely in control and began to keep a significant portion of the profits generated by the business.

So while the FTC is key to understanding North Korea’s foreign trade, it is also arguably key to understanding North Korean-style markets. As a result, it is important to identify when FTCs started to behave like de facto private companies, how and also why. That is a question that remains unanswered, and needs answering if we want to understand North Korea’s bizarre and often tragic economic history.

Main picture: NK News