Although largely unnoticed and still basically unknown outside the country, the early 1990s witnessed a revolution in the way North Korean state-owned enterprises (SOEs) were managed. The North Koreans emulated China and went far further, before they even had a name for what they were doing: “Grasping the big, letting go of the small” (抓大放小).
Back in 1997, the Chinese government released ,control over a large number of smaller SOEs, privatizing them, while maintaining state control and support for enterprises in strategic industries – heavy industry, defense, telecommunications, transport et al.
Smaller SOEs were privatized and left to the market, while larger firms in important sectors were often further enlarged through mergers, becoming the bedrock of galloping industrial output growth and multi-decade long boom in infrastructure investment.
The story for North Korea could not have been more different, but in a strange and important way, the DPRK government pursued a policy that was eerily redolent of this in the lead up, during, and following the famine: let the small or insignificant enterprises fend for themselves (“practice self-reliance”) – this often involved markets – while maintaining full control over the major nodes of state economic power.
THE STALINIST SOE
Until at least the late 1980s, civilian North Korean enterprises had their budgets set and controlled by and through the central bank – or through a few other state banks.
Prices and budgets were controlled centrally, with factory managers having little autonomy (at least on paper) in wage and price setting, or over how the funds that their enterprises held were spent. In actual fact, their budgets were directly provided by the state, with even “liquid funds” (working capital) being controlled and managed by the state via the state banking system.
The state would provide all the funds an enterprise needed for its operations and take all its profits at the end of the planning period (SOEs in such a system are called “state enterprise budget system enterprises”).
A previous attempt at reform in the mid-1980s had led to the creation of ‘industrial combines’ – SOE conglomerates – that were supposed to have some autonomy on price setting, wages, and budgets (“independent cost accounting system enterprises”).
However, in practice, Kim Il Sung was not enthusiastic about some workers getting paid large bonuses, or SOEs being allowed to engage in actual market activities with one another. Thus, the beyond the rhetoric, from what we know the central state banks and planning apparatus maintained tight control over the daily operations over SOEs.
GRASPING THE BIG…
If you watch North Korean TV today, you will see news about the economy. The state is very proud of its large industrial combines and model collective farms. It is also very serious about its military-industrial complex, and for good reason – nuclear warheads, ballistic missiles, and artillery shells are the major leverage they have on the world stage.
The extent to which individual enterprises of this type – mainly Special, First, Second and Third Tier centrally managed enterprises – are under direct state control in their budgets, price setting, and wages cannot be determined.
But North Korean refugees with experience working in major foreign trade enterprises, major industrial combines, and the defense sector suggest that the central state and Party continues to (as of 2014) maintain greater control than it does in much of the rest of the economy.
Control involves direct cash subsidies (including in foreign currency), as well as the right to purchase goods and services from other enterprises at token prices (“state-set wholesale prices”).
Foreign trade enterprises have subsidiaries and affiliates often have far autonomy, but the parent companies are usually far too strategically important to escape the eyes of the state and central party organization. Larger industrial combines involved in military-related production are also liable to have less autonomy – but also far more support from the center as well.
…AND LETTING GO OF THE SMALL
Control is not just about the naked exercise of power and coercion: contrary to what some might believe, the writ of the North Korean state in economic matters has much more to do with carrots than it does with sticks. The government can issue orders and even have managers beaten and shot if it wishes, but it does understand that even if it does, this will not magically make supplies and machinery out of thin air.
In 1990, Kim Jong Il gave a speech on finance where he laid out the new line. Henceforth, the state would provide loans to enterprises to expand production, but they would be made actually financially independent.
In reality, he was talking about smaller and less strategically important enterprises – tier 4, 5, 6, and 7 enterprises as well as larger enterprises in sectors that the state did not deem strategically important, and those under the regional not central government management, and while the system was proclaimed in 1990, it seems not have been fully implemented prior to the famine of the mid-to-late 1990s.
The system was supposed to involve what direct bank loans to SOEs to finance investment and the end of much direct state control and funding for many enterprises. In practice, it appears that at some point in the mid-1990s, state and local government funding mechanisms for enterprises with budget shortfalls being abolished (see first article listed) and replaced by loans.
The writ of the North Korean state in economic matters has much more to do with carrots than it does with sticks
But the state banks had little money to lend. In the name of ‘regional self-reliance’, smaller firms were told to fend for themselves, and they took to all manner of semi-legal and illegal side-activities like private farming and livestock rearing, selling off machinery for scrap metal, and inviting business people in the emergent private economy to secretly invest in new or existing kinds of production, as well as selling permits to engage in economic activity to private business people (so-called ‘pseudo-state enterprises’).
Many of “the small” became zombie enterprises unable to produce what they once did, and their personnel faced extreme economic privation and even starvation. The ones who were more lucky had wives and other family members who were able to find ways to make money on markets, or enterprising managers who were able to figure out ways to use company assets to get their workers fed.
In the Kim Jong Un era, things have begun to change, with enterprises now being granted substantial autonomy when not engaged in matters of central importance.
However, until the early 2010s, “the small” survived through a range of practices that the state was forced to turn a blind eye, now it seems to be slowly moving in the direction of positive encouragement.
Edited by Oliver Hotham
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Featured Image: by nknews_hq on 2018-01-14 23:47:55