A Capitalist in North Korea

by Felix Abt

  The North Koreans, like their southern brethren, were hard workers—and it showed. Laborers sometimes stayed overnight and worked weekends without resting, sometimes even for weeks if an urgent project needed to be finished. Workers didn’t complain around us about long working hours. I observed this in my North Korean business partners as well as in the factory I was running myself. I must admit, though, that our workers were remunerated substantially better in cash and food.

  David Woods, the manager of the Eermel cashmere garment factory in Mongolia that employs 80 North Korean workers told the media: “They are hard workers, they don’t complain.” Approximately 3,000 North Korean workers are already employed in Mongolia, 20.000 in Russia and about 3 to 4 times as many in China with a rising tendency, generating dozens of millions of U.S. dollars income for their country. The Pyongyang-based General Corporation for External Construction (GENCO) has built lots of dwellings and public buildings in Kuwait and completed more recently the 64-storied Al-Fardan Tower in Qatar. The Mansudae and the Paekho art studios have built numerous monuments and panoramas in more than a dozen countries. They have become renowned for their extremely short span of construction time and the very competitive low price.

  I always wondered how North Korean workers could pull off feats with their miniscule salaries. Their monthly salaries consisted of the equivalent of $3 to 4 per month—even less than minimum hourly wage for South Koreans. And their living conditions were anything but luxurious.

  Average salaries in the 1970s and 1980 used to hover just around 70 to 80 won and around 100 won by the early 2000s. Since 2002 they have remained around 3,000 to 6000 won. Until the early 1990s there was comprehensive rationing unmatched by other socialist countries and only one employer, the state, which distributed foodstuff, produced by a then still functional state-controlled agricultural sector, and many other consumer products free of charge to its employees.

  Education and health care, accommodation as well as transportation were free of charge or cost next to nothing. Salaries constituted then mere pocket money to buy things like cigarettes or movie tickets. However, when the socialist rationing system collapsed during the 1990s and the agricultural sector was not able to produce enough food any longer, most people turned to technically illegal, free market activities to earn real salaries to pay for food and all other daily necessity items—or to barter—for the first time in their lives. That’s when a market economy started emerging.

  Unfortunately, power outages and other shortages proved to be beyond the control of workers, a hindrance that would block their ability to produce things. But even if a worker did, in exceptional circumstances, overachieve his targets and earn 8000 won, or around $7, thanks to his or her effort the income never lived up to growing living costs. In the mid-2000s, the price of rice fluctuated but generally hung around 2,000 won per kilograms, and corn stood at about half the price of rice during the years I lived in North Korea. Compare that to a typical monthly salary of 4000 to 5000 won.

  Think about it this way: a pair of imported Chinese socks went for 1,000 won, or one eighth of the typical laborer’s monthly salary with added bonuses. How would the average American office clerk, to name a comparison, feel about paying $250 for a pair of socks out of a $2000 per month salary?

  Perhaps this was balanced out by the fact that North Koreans received rice and grain free of charge through the Public Distribution System (PDS). In a measurement of calories, housewives received 300 grams of rice per day, while heavy-duty construction workers and miners were rewarded 900 grams. However, the PDS followed through with its promises irregularly, because it depended so heavily on good harvests, food donations and logistical resources. At times, the state simply did not have enough grains to hand out, especially in rural areas. When it did, the rations were far below the promised quantities. Much of the food aid, contrary to popular belief, was not stolen because it was handed out in the presence of WFP staff.

  Koreans simply learned to make do with the situation. In the 1990s, they developed extraordinary skills to make it by, such as by opening informal private businesses on the side. Petty trading among the masses led to a quasi-marketization in the world’s hitherto most centrally planned economy, according to North Korea historian Andrei Lankov.

  Women, in a North Korean socialist tradition, were engaging in trade and countertrade and, with the support of husbands and other family members, ran small scale household productions which included sewing garments, making furniture and shoes, doing repair work, gathering wild foods for themselves and others, preparing food for sale, running food stalls, doing hairdressing, growing vegetables on balconies, gardens and plots elsewhere for their own consumption and for sale in markets. In that sense, to quote Chairman Mao, women really did hold up “half the sky”—or even more!

  Even North Korean households became a subject to some sort of market supply and demand, even if it not on a large scale. Local people made use of every piece of space in their rural households, which typically consisted of 100 square meters on average. Every plot of land was cultivated with vegetables and fruit as well as small livestock such as chickens, rabbits and pigs, in addition to the much larger private plots on slopes (because flat, accessible land was reserved for state enterprises) they were exploiting as much as possible. Unlike for state-collectivized farms, which were subject to currency exchange and import restrictions, private households could get what they needed with the Korean won.

  The prices for these items were not state-pegged, so families could take a profit and reinvent it in more baby animals and feed. It was the state farms that were tied down by these measures which made them unable to compete in markets and to produce more. Having recognized this, Kim Jong Un worked out a new agricultural policy in 2012 addressing some of these problems. Indeed, farmers were told in July 2012 that the state would henceforth take only 70 percent instead of 100 percent from their entire harvest.

  Private ad hoc rental services enabling a larger number of kids to skate

  Even the most ardent of state companies turned to the markets and private traders for raw materials and other items. Almost everybody seemed to be involved in some private business, not only the most needy families—but also wives of party and government officials, who combined entrepreneurship with knowledge from their state connections. It is an “East Asian” route of economic development in which elites unavoidably enrich themselves while at the same time allowing a middle class to develop and poverty to drop.

  Like in many parts of Asia, a lot of men are heavy smokers, a pastime that cuts into their seemingly small salaries. But maybe they’re not that small: the most popular cigarette brand in North Korea is “Craven A,” made by a joint venture factory, a pack of which was sold in markets for 1,500 won. How could they afford packs of cigarettes costing half their monthly salary if they did not have a substantial “private” extra income? If we assume that at least three-quarters of the population lives on income from private economy activities, the actual GDP could be more than double the official one.

  Two North Korean women, on the left, shop next to foreign resident foreigners in a luxury shop in downtown Pyongyang that accepts only hard currency. While the foreign shoppers may have a monthly income of a few thousand US dollars, these North Korean shoppers may not be far off: their monthly income, taking into account all the private businesses, ranks an estimated thousands times higher than the official state salary for North Koreans. Clearly, there was a silent source of wealth that many outsiders did not see.

  Emerging food stalls and kiosks privately-run by women

  Aid dependency

  In spite of the rapid changes underway in North Korea, the community of humanitarian do-gooders that played an important role during the famine was not open to market thinking. I began representing ABB every Friday morning at the WFP building’s interagency meeting, where representatives of UN organizations, EU aid programs and NGOs discussed their activities and plans of action. The S
wedish ambassador introduced me there; it therefore seemed reasonable that we could get involved in some meaningful smaller, decentralized infrastructure projects like supplying solar power and pumping clean water.

  I went to the next few meetings, listening to the discussions without saying anything. At the end of one meeting, the presiding UN official took me aside to tell me that he and others felt uncomfortable in the presence of the representative of a for-profit company. My presence, he claimed, set a precedent for other companies to come to the meetings, which were intended for non-profits. His whinge was frivolous. With so few foreign companies operating in North Korea, there was a miniscule risk that the private sector would overwhelm them—and among that group, I was the only one who expressed interest in these meetings.

  The real dilemma was that the aid community was holed up in an intellectual silo. Humanitarian organizations, for all the help they offer, thrive on human misery. They also considered our interests to be at odds with theirs. As has happened in Cambodia and parts of Africa, the organizations would have preferred to create a “culture of dependence,” a point that the North Korean government was correct about in its statements. After all, many well-paid jobs depended on the continued presence.

  Business people, on the other hand, pursued a different strategy of what the French sociologist Alexis de Tocqueville called “enlightened self-interest.” That’s the tendency of businesses to want to inject true, sustainable reforms in North Korea, creating a feedback loop in which profits return to them later. But the aid organizations had every interest in doing the opposite: they originally intended to offer emergency assistance to a country at rock bottom, and then leave when no longer needed. But they were cementing the status quo to make themselves indispensable. And that’s why we were serious competitors.

  That business people were unwelcome in their eyes may have had other reasons as well. Neither I, as the ABB representative, nor any other Western company representatives were ever in a position to sell anything to them, as far as I know. Although I could compete quality and pricewise with Chinese suppliers, my competitive disadvantage in the eyes of aid workers busily traveling to China must have been my signature on an ABB compliance paper.

  This prohibited me from paying kickbacks to my customers in exchange for contracts. Resident aid workers, on the other hand, had funds from their donors to buy water pumps, generators, tractors and the like. They preferred to buy all this from suppliers in China, who generously entertained them.

  The aid industry, moreover, distinguished itself from commercial industries in its inefficient allocations of resources. For example, PyongSu had been visited three times over one and a half years by WHO inspectors, demanding to see evidence of changes in accordance with the GMP standards.

  When, after two years the WHO at long last confirmed that we were fully GMP-compliant, I asked UNICEF to purchase from us on competitive terms. But UNICEF refused, and wanted to send their own inspectors to start the whole procedure anew, possibly to maintain the cozy relationship with their existing suppliers. Such costly exercises ate away at donated funds, which were being diverted from the needy.

  Another time, the country director of the Swiss Agency for Development and Cooperation (SDC), which sponsored the Pyongyang Business School, told me to reduce the small budget for paper and pencils given to students. He then cut the budget for the publication and distribution of seminar texts for North Korean companies, government agencies and universities.

  The same year, he bought at least six new vehicles, mostly Toyota Landcruisers, for the staff—at a cost exceeding by far the total budget of the Pyongyang Business School. Our annual budget was less than $250,000, while the new cars must have cost far more. In this case, Swiss taxpayer money did not reach the intended beneficiaries, but was, once again, spent on comfortably maintaining an organization for the sake of itself.

  My experience in North Korea convinced me that I would never again donate money to a UN-affiliated bureaucracy. Rather, I’d be generous with the Bill and Melinda Gates and George Soros foundations, where I believe bureaucracy is kept to a minimum and effectiveness is high; their founders, who were private businesspeople, built up their careers on cost-effectiveness and efficiency and wouldn’t tolerate waste.

  A few specialists have observed this tendency. “The foundation has brought a new vigour,” said Michael Edwards, a veteran charity commentator in The Guardian in 2010. Seth Berkley, head of the International Aids Vaccine Initiative [IAVI] agreed, stating, “The foundation has the advantage of speed and flexibility. When they want to, they can move quickly, unlike many other large bureaucracies.”

  I also came to know that smaller religious NGOs were far more efficient than the big organizations. They gave me insight by comparing their budgets with larger organizations. Every dollar spent by one particular religious NGO, for example, yielded 2.5 times the results of a dollar spent by larger organizations, although I promised I would not quote their names.

  From the viewpoint of the Workers’ Party, the days of humanitarian aid are numbered. Unlike the parties of the former Soviet bloc, the Korean Workers’ Party developed an unmatched ability to install a sense of security—a fervor towards national unity, if you will—despite the enormous affliction of shortages and famine. Its general secretary was legitimately considered a wise, fatherly leader and protector. Astoundingly I never came across people who would have criticized or even challenged the system, nor did I meet expatriates who would have heard about such cases. When North Koreans did talk shyly about minor shortcomings, they did not tie it into a more grandiose hope for political change.

  Put yourself into the shoes of the average North Korean, and the unity behind the party seems even more remarkable. The low income did not offer villagers and laborers an incentive to work hard. Workers were motivated by calling on their patriotic feelings and having them work for lofty goals such the construction of a “socialist workers’ paradise” or a Gangseong Daeguk, meaning a “strong and prosperous nation.”

  Interestingly, the South Korean president and strongman Park Chung–hee wanted his country to become a strong and prosperous nation too, when he launched in 1970 the “New Community Movement.” Diligence, self-help and cooperation were then popular propaganda slogans which sounded similar to those in the North. There was not just a geographical proximity between Northerners and Southerners but also one in spirit.

  Techno-fetish

  In 2003, I traveled on a North Korean delegation to the Kiruna mine in Sweden, the largest iron ore mine in the world. Accompanying me was the director of North Korea’s Musan Mine, which is Asia’s largest iron ore mine. He was not so much impressed by the sheer size of the place, but by its technological savvy. In a scene that would be appropriate for 2001: The Space Odyssey, the miners sat in air-conditioned rooms looking at monitors, from which they directed unmanned excavators and trains.

  As I have described before, North Koreans are “techno-fetishists.” They believe that advanced technology can help solve any problem, regardless of whether the technology makes sense economically. Chinese investors and buyers of mining products, on the other hand, usually wanted to buy cheap second-hand equipment for the mines they wanted to exploit. From an economic point of view this made perfect sense, ensuring a relatively faster and risk-poorer return-on investment.

  In short, the two positions were not reconcilable: North Korean techno-fetishists were interested in high-tech gadgets, while the Chinese businesspeople placed profits at the forefront. Since the North Koreans had the last word, cheap, at times second-hand and non-state-of-the-art equipment was rejected.

  As the representative of mining equipment manufacturers like Sandvik, I urged the North Korean counterpart to equip the mines with technologies that would outlast the short-term, during which the Chinese investors would exploit the mine and then leave. After the contract expired, the North Koreans would then not be able to work the mine for much longer, thanks to wear and tear o
f the cheaper equipment. The Chinese miners, in the end, begrudgingly bought our equipment.

  The sophistication of North Korean businesses

  Contrary to popular belief, not everything in North Korea is ordered top-down, an assertion that critics argue makes private business competition impossible. Many North Korean companies pursued their own opportunities regardless of what their so-called “overlords” in the government wanted. For example, I drank Cola drinks from bottles that looked like and tasted similar to Coke. At least two North Korean beverage producers were in that market, and they were indeed competing for the loyalty of their customers.

  A senior official at the State Planning Commission told me that “a healthy competition between manufacturers within the socialist planned economy is not unwelcome.” Competition among them was lively. In rural towns and villages one could see “Compost Competition Production Charts” showing the results of competing neighborhood units racing to collect kitchen waste, mud and even human excrement to produce compost.

  Although they were not supposed to reveal “unhealthy” rivalry in front of foreigners, enterprises had difficulties in hiding how fiercely they were competing for foreign customers.

  And of course most, if not all North Korean companies were interested in selling products to foreign companies. In April 2012, Kim Jong Un acknowledged in a landmark speech that he will make sure that North Koreans “will never have to tighten their belt again.” Indeed, ever since he took over the succession, a number of economically-oriented policy advisors have risen to power. This will lead to more streamlining of the bureaucracy and the creation of a more investor-friendly environment.