An NK Pro analysis of largely unnoticed North Korean publications in law and economics journals indicates that the DPRK under Kim Jong Un has, since 2014, seen significant change in how State-owned Enterprises (SOEs) trade with one another and sell to the consumer.

Analysis indicates that:

  • Previous reforms that legalized some forms of inter-enterprise trade were far more limited, and treated markets as supplementary mechanisms rather than as a core part of enterprise activities;
  • Market contracting (transactions) between SOEs for labor, land, capital, industrial goods (supplies, equipment), intangible goods (technology transfers), services (construction), and consumer goods now have a formal legal status, and are a core function of enterprises;
  • There appears to be no market for firms, and the transfer of actual ownership rights between firms also appears to have not yet been marketized;
  • They continue to expand, with the state having quietly granting additional rights to SOEs since 2014 to allow for additional forms of market transactions in areas previously considered to part of the central plan (5-year development strategy).

Legal markets before 2014

Small-scale consumer markets

Markets have existed in North Korean law since at least the 1990s, and Kim Il Sung had previously directed that markets be tolerated in the late 1960s. However, these markets were between consumers and/or small-scale producers. Their official name is telling: “farmers markets,” markets for the sale and resale of food products.

Enterprises were not supposed to be involved in such markets, and given that most of what people consumed was produced by SOEs, this meant that most SOEs and consumers got most of what they bought through the state planning system- at least until the 1980s.

The strict line between the planning system and farmers markets began to breakdown due to chronic shortages, and the institution of some reforms in the 1980s that allowed for the use of markets for the sale of some consumer goods produced from surplus supplies and labor – the so-called “August 3rd Consumer Goods Movement.”

However, much of the state sector remained largely outside the emergent market system. The planning system still dominated what enterprises could do, outside of some retail and service sectors that were far easier to marketize due to low start-up costs and areas where state-owned assets were not required for production.

Additional changes post-2002 broadened the scope of goods and services that could be legally sold, how often markets could open, and the kinds of space they occupied. Outside physical markets, North Koreans were also permitted to sell their own personal property, as they had been before.

Much of the state sector, including state-planned commodities, remains outside the emergent market system | Photo: KCNA

Socialist Supplies Exchange Markets

Inter-enterprise markets did not legally exist until they were introduced in 2003. As has been previously covered in NK Pro, these were the first Business-to-Business (B2B) markets to exist in North Korea since the late 1950s.

Enterprises were (and seemingly still are) permitted to sell a range of commodities on such markets. A book released in 2005 by the Korean Workers’ Party Press, “An Explanation of Our Party’s Songun Era Economic Ideas,” indicates that enterprises are permitted to sell the following commodities on B2B markets:

  • Additional commodities resulting from production normalization
  • Commodities produced in excess of the enterprise’s plan
  • Export commodities that do not have an export route
  • Commodities produced through the resolution of supply issues
  • Commodities produced outside the plan (excluding August 3rd Consumer Goods)
  • Unused supplies
  • Commodities produced by research institutions outside the plan
  • Commodities that failed quality control tests
  • Impounded or otherwise dispatched/mobilized commodities
  • Some farm produce including grain

The issue with this system is the emphasis on its supplemental function. Indeed, formal B2B markets remain an ancillary part of North Korea’s supply system, with enterprises instructed to focus primarily on planned production. It is in changes to the planning mechanism, therefore, through which the scope of markets inside the North Korean state industrial, service, and agricultural sectors has been expanded.

The Order Contract Revolution since 2014

Although not widely understood even in North Korea-watcher circles, the DPRK under Kim Jong Un has sought to actively cohabit with, and formally integrate, certain parts of the market economy with the state.

This process of integration has required reforms to price setting, the legalization of some private financing, but also the creation of an expanded form of inter-enterprise market contracting reflecting the fact that the state does not have the resources to supply enterprises directly, and to resolve the inefficiencies of the planning system.

However, reflecting decades of anti-market propaganda in the North, the government has decided to create a politically correct facade for a broad integration of market mechanisms into the North Korean state sector.

NK Pro analysis has previously revealed that a new contract form, the “order contract,” is essentially a code word for inter-enterprise market transactions.

The order contract exists outside the central plan (Five-Year Economic Development Strategy) and regional plans set by regional planning committees, and enterprises are permitted to enter into contracts where terms that reflect market prices and conditions. Under the central plan, prices are set by the state, usually artificially low, inputs are supposed to be provided by the state, while output is supposed to be given to the enterprises to which the state allocates it at the price set by the state (not the market.   

The full extent of the system was not clear from sources available to NK Pro at the time, though. Analysis of sources since obtained indicates that the system is far more extensive than has hitherto been known. The following is a list of the type of order contracts, given in the an article carried in Politics and Legal Research (2016:1; below ‘the PLR article of 2016’),  enterprises are now permitted to sign:

  • Supplies Order Contracts
  • Haulage/Freight Order Contracts
  • Consumer Goods Order Contracts
  • Scientific Research Order Contracts
  • Processing Order Contracts (i.e. subcontracting/outsourcing of production)
  • Construction Order Contracts
  • Warehousing/Storage Contracts
  • Rental Order Contracts
  • Surplus Labor Order Contracts

This list is highly significant: it suggests that an inter-enterprise market for freight, scientific research, subcontracting of production, construction, storage, real estate, and even labor now exist. It is not clear whether haulage contracts include rail haulage, or whether any of these categories includes the provision of electricity, gas or water for industrial uses.

Nevertheless, it is clear that the scope of potential market transactions now encompasses much of economy. Not only can enterprises trade in supplies, equipment inter alia, but they can now provide each other with land and labor, as well as business services like construction. This represents a major expansion of the scope of legal markets in North Korea.

And it appears that the order contract system has been expanded since it was first enshrined in law in 2014. The scope and content of order contracts is regulated under the “Enterprise Indicator Planning Standard Regulations” (EIPSR), specifically Article 4 stipulates how the system is to be used to plan enterprise operations, and Article 5 states what content such contracts must contain.

Published DPRK law indicates that order contracts can only be used to fulfill enterprise-level plans, i.e. enterprises engaging in their own operations outside the central plan. However, the PLR article of 2016 states that order contracts can, under the EIPSR, be used in the fulfillment of plan targets set by the central and regional planning committees.

This is further explained in an article in the same journal in 2017 (below ‘the PLR article of 2017’) that says order contracts can be used to fulfill targets set as additions to the existing central and regional plans. In other words, if the state asks an enterprise for additional output, during the planning period, it accepts that market prices will have to be paid for this, and that it cannot simply demand enterprises provide more than was initially agreed without due compensation (at market rates).

The PLR article of 2016 also gave a list of items that could not be the subject of order contracting:

  • Centrally planned commodities
  • Equipment registered as the fixed assets of enterprises
  • State-controlled items like pharmaceuticals and precious metals

However, the PLR article of 2017 implies that this may no longer be the case, and that regulations appear to have subsequently been further relaxed. It states “there must be no restrictions placed on order contracts that do not interfere with the fulfillment of the central plan”.

The DPRK under Kim Jong Un has sought to actively cohabit with, and formally integrate, certain parts of the market economy with the state | Photo: KCNA

It appears from this and from other parts of the PLR article of 2017 that the scope of produce that can be traded through order contracts has been expanded since the system was first introduced in 2014. It states that “haulage” and “processing” had been added to the list of areas where order contracts can be used.

The North Korean government seems to be going through a process of rule writing and rewriting, gradually expanding the role of market forces inside the state sector.

Conclusions

Information about institutions inside North Korean economy remains highly inaccessible to outside observers. However, North Korean official publications point to a growth in the range of market transactions that North Korean SOEs are permitted to engage in.

Central planning is still used in the allocation of a wide range of resources, but order contracts are not conceived of as being a supplemental mechanism by which enterprises are supposed to obtain resources. Rather, enterprises are positively encouraged to use them as the major mechanism by which to obtain resources and dispose of produce under the “enterprise plans” that they are obliged to draw up and fulfill.

In this respect, order contracts represent a qualitative change in the role that market processes are legally supposed to play.

The next stage of change will likely require the further reduction in the scope and size of the central plan, with order contracts playing a yet broader role in the allocation of resources between enterprises.

It is telling that there does not yet appear to be equity order contract (i.e. a contract that allows enterprises to own shares in one another or buy one another), a land purchase order contract, or a building order contract (allowing enterprises to purchase existing buildings off one another).

This is probably because this would require that the North Korean state admit that managers personally profit from their firm’s performance and allow managers to make large capital gains from the sale of firm assets. Right now, at least, this appears to be a capitalist step too far.

Edited by Oliver Hotham

Featured image: KCNA

This article is for NK PRO users only

Don't miss out on today's articles.

Get behind the headlines in North Korea with NK PRO.

To continue reading, contact us for subscription information:

Find out about nk pro

Existing Member?