by Ralph Hassig
While his father was alive, Kim Jong-il had only limited scope to try out new economic ideas, not so much because his father might disapprove but because the entire top level of the leadership was of his father’s generation, and as long as they continued to lead a comfortable life, they saw no need for change. But after the three-year mourning period, which largely overlapped with the three Arduous March years, Kim tried to revive the economy with two related campaigns, both announced around the time the Supreme People’s Assembly was convened in 1998. The kangsong taeguk (“economically strong nation”) campaign called for the people to return to the glory days of the 1950s, when great strides were made in heavy industry. By the 1990s, many of North Korea’s industries, such as the steel industry, were hardly in better shape than they had been after the Americans bombed them during the Korean War.
The other campaign, launched by Kim to firm up his political position with the generals, was “military-first politics,” whereby the military not only had first call on the country’s resources, which had been the case since the 1960s, but would serve as a model for the rest of society. Neither of these campaigns promised a way out of North Korea’s economic difficulty: expecting people to think and act as they did in the 1950s was not likely to work in the twenty-first century, and devoting the country’s best resources to the military would only keep the economy unbalanced.
In 2001, Kim urged North Korea’s bureaucrats to “make fundamental changes in their ideological view, their ways of thinking, their ways of acting, and their fighting spirit.”5 Henceforth, the guiding economic principle would be to achieve cost-efficient results, rather than results at any cost—as long as business was done within the bounds of the socialist command economy: “If the results of economic activities barely compensate or cannot compensate at all for materials consumed for production, compared to expenditure, and if products fail to have utility value or give negative influence to labor conditions, living conditions, and living environment, no matter how great the results of economic activities may be, we cannot say that such results actually contributed to the nation’s development and prosperity and to promoting the people’s living.”6 The key to getting results is supposed to be high technology: “Every sector and every factory and enterprise of the national economy are, without exception, left unable to make headway even a step without modernizing and renovating their obsolete processes, equipment, and production methods.”7
Economic bureaucrats must take care when implementing this campaign because if any of their policies fall outside the scope of “Kim’s intent,” they might be out of a job and on their way to prison. For the North Korean worker and factory manager, the key question is where to get new technology, given North Korea’s lack of foreign reserves and its status as a strategically embargoed state. Kim puts the burden squarely on the shoulders of the people: “To modernize local industry plants with up-to-date technology is a major requirement that each local organ of power has to meet to fulfill its duty as the householder responsible for local economic development and improvement in the residents’ living conditions.”8
The July 1 Economic Management Improvement Measures
On October 3, 2001, Kim met with high-level economic officials and gave shape and substance to his “new-thinking” idea, at the same time making clear that he and the party had made no mistakes in formulating previous economic policies; instead, Kim blamed economic bureaucrats for failing to carry out their duties properly, although he did concede that the party’s earlier economic policies were not necessarily appropriate for North Korea’s current economic situation.9 He also insisted that the Chinese economic model, the results of which he had briefly observed on his trips to China, was not one that North Korea should imitate.
He said the State Planning Commission would continue to set broad economic goals (under the direction of the party), but it would be up to local officials and managers to set their own goals—up to a point. Managers would be free to set prices (within state guidelines), decide how to sell their products (after supplying their quota to the central government), and figure out how to procure raw materials. They could also set up foreign trading companies to sell surplus goods and purchase supplies abroad. Companies that could not secure raw materials must send their workers out to earn money in other endeavors. Prices for food, housing, fuel, and similar daily necessities would henceforth be set according to their cost to the state, which would continue to provide social welfare programs, such as health care, schooling, and retirement, free of charge (although in a much degraded state). The goal of the changes was not to replace the planned socialist economy with a market economy but rather to make the planned economy work better so that the people would stay in it.
The 2002 New Year’s editorial, beginning as usual with the boast that an economic “breakthrough” had been made in the preceding year, announced, “Our socialist construction, which experienced hardships for several years, has now entered a new phase of radical change. We can dare to say with pride that we have taken an offensive position in the building of an economic power, fully ready to launch an overall offensive.” The only reference to the specifics of a new economic plan was the vague statement, buried in the middle of the editorial, that the “main orientation” of economic management would be to “ensure the highest profitability while adhering to socialist principles.”10
On June 1, 2002, an internal government document distributed to upper-level military and economic cadres outlined a new economic policy. “At present, commercial transactions are rampant because state prices are lower than those of farmers’ markets. As a result, we see a phenomenon in which goods are lacking in the state but are piled up for individuals [i.e., a few fortunate individuals]. To be frank, the state does not have money at present, but individuals have money exceeding two year’s of the state’s budget. … From now on, regardless of who they are, all will live on living expenses accorded to them. Nothing will be free of charge, and there will be no egalitarianism.”11
July 2002 would prove an otherwise typical month for North Korea. The Arirang mass gymnastics festival, scheduled to close at the end of June, was held over, although foreign attendance was sparse. Relations with South Korea were strained in the wake of a June 29 North Korean attack on South Korean patrol boats in the West Sea, although at the same time the North Koreans were requesting South Korean aid, which they were confident of receiving from the ever-optimistic South Korean government of Kim Dae-jung. Pyongyang’s relations with Washington continued to be strained. After the West Sea clash, the U.S. government informed the North Koreans it was canceling a plan to send a delegation to Pyongyang in July to discuss bilateral issues.
At noon on July 1, local meetings were convened across the country to convey to the people the gist of the new economic measures that would take effect immediately. News of economic changes resulting from what came to be called the July 1 Economic Management Improvement Measures (Kyungje Kwalli Kaeson Jochi) slowly trickled out of North Korea over the next month. Foreigners, especially those who were optimistic about North Korea’s future, often refer to the measures as “reforms,” but the North Korean government avoided using that term because it implied there had been something wrong with the original economic system.
The most comprehensive reports on the measures came from Choson Sinbo, the pro–North Korean newspaper in Japan. A July 29 article reported that the North Korean government would no longer provide food and housing subsidies. “At their homes, people now have to do some mathematics to find out how much they can spend monthly and they have to save as much as possible.”12 According to the article, the price of a Pyongyang city bus or subway ride had increased twentyfold, from 0.1 to 2 won, to cover operating expenses. Prices of other consumer goods and services were likewise rationalized. The price of a kilogram of rice rose 550 fold, from .08 won (virtually free with a ration card) to 44 won. Prices of most domestically manufactured goods increased twenty-five-fold. The government began to c
harge rent on houses and apartments and to tax farmers for the use of their small “private” plots of land. Price tags were put on almost everything. According to one former North Korean, inspectors visited homes and assessed fees on electricity according to what lights and appliances were being used. While they were there, they might also search for unregistered items such as radios and videotape players, forcing homeowners to pay bribes to stay out of trouble. Before July 1, the cost of food (when rations were available), accounted for only a small percentage of the household budget; at the new prices, food purchases consumed half or sometimes much more of the budget.
To cover the costs now intruding on their lives from every direction, the average worker’s monthly wage rose from 200 to 300 won to 4,000 to 6,000 won. As the Choson Sinbo article explained, “Factories and enterprises that increase their earnings will receive proportionally higher shares of distribution. Workers’ pay will also rise proportionally. Only naturally, if these entities’ revenues go down, the workers will also have to live on pay that is lower than that provided by the government so far. Good-for-nothings will not be able to live.”
The flaw in the new economic measures was that in order for the payment-for-results model to succeed, work organizations had to be able to operate and make a profit so they could pay the workers. However, if workers, whom the state assigns to their jobs, are unable to produce anything at their workplaces, they have the choice of starving or finding employment in the black market economy.
Before the July 1 measures were enacted, cooperative and state farms were supposed to sell most of their crops to the government, which distributed food through the Public Distribution System (PDS) at a nominal cost to consumers. In the distribution, some people received more than their share not because they did more work but because they had political connections; by the 1990s those without connections received hardly any rations at all. Farmers preferred to sell their crops in the markets, where they could earn hard cash rather than the modest payment provided by their cooperatives, thereby creating a tremendous grain leakage that starved the government’s ration system. This same process operated in other economic sectors. Coal miners could earn more money selling their coal directly to households rather than to the government.
To revive the socialist economy, the central government allowed factories to sell much of their output on the open market and, in turn, to take responsibility for procuring their own resources. The government would continue to set guidelines for production and pricing, but it was up to factory managers to find a way to keep their factories running. This was an entirely new responsibility for the managers, and it came at a time when the entire economy was short of resources. Many factories began to make alternative products for which local resources or markets were available. For example, an aluminum factory might switch from making aluminum sheeting to making cooking pots, which were more marketable and required less metal. The government recommended that factories that found it difficult to operate should send their workers out to alternative jobs such as growing crops or cutting trees, but this was hardly a suitable substitute for the regular operation of the factory, in terms of either the revenue that could be gained from these makeshift jobs or the efficient use of workers’ skills. Workplaces were also given the responsibility of providing for the welfare of their workers, for example, by finding food for them.
Whether workers stayed in their workplaces or went out on their own, they had to cope with another problem triggered by the July 1 economic measures: inflation. Prices increased dramatically after July 2002. For example, by late 2005 a kilogram of rice was selling for between 600 and 1,000 won in the market, which was the only place most people could procure it. By early 2008, the price was about 2,500 won—a significant jump from the “official” price of 44 won in July 2002. The government’s exchange rate jumped from 2.2 won to the U.S. dollar to about 140 won, where it stayed into 2008. However, since 2002, the market exchange rate has ranged from 2,500 won to 3,500 won to the dollar, meaning that a typical North Korean’s monthly wage of 5,000 won would buy no more than $2.00 in hard currency.
The July 1 economic measures roughly paralleled the New Economic Policy (NEP) instituted by the Bolsheviks shortly after the Russian Revolution in that the NEP was not the direction the communists wanted to take, but they needed to get the economy moving before taking firm control of it. The NEP lasted only a few years in the early 1920s and differed in one important respect from the July 1 measures: the NEP was meant to be a springboard to communism, whereas the July 1 measures, coming fifty years after the communization of North Korea, were a desperate attempt to rescue the North Korean economy from communism.
The July 1 economic-improvement measures provided valuable, if difficult, lessons for the North Korean people. They lost the innocence of living in a low-grade socialist “paradise,” and they came to realize there is no free lunch and that free riding imposes serious costs on the economy, even if those costs are not directly laid at each individual’s doorstep. With the measures, the Kim regime hoped that people would become more responsible and productive socialists. Instead, people concluded that socialism is a sham and that the only real economy is the market economy. That economy is a harsh environment for many North Koreans, who have few economic resources (e.g., capital) to work with, virtually no laws to protect them as they trade in the market, and limited market education and experience to guide them. And finally, as a consequence of the breakdown of the socialist market, Kim Jong-il’s image as a benevolent ruler and economic genius has been irreparably damaged.
Manufacturing and Marketing
A reasonable estimate is that by 2002, three-quarters of all factories had shut down. The transportation sector is a shambles: most intercity roads are unpaved, decrepit trains travel at twenty miles an hour, when the power is available, and some open-bed trucks, the main means of intercity transportation, have been converted to charcoal burners. The country’s principal exports are minerals and fishery products, not manufactured goods. North Korea’s heavy-industry plants are obsolete, a great irony considering that heavy industry is supposed to be the cornerstone of Stalinist economies. The one bright spot is North Korea’s weapons plants, which manufacture everything from small arms to missiles, but these plants are operated by the military and provide no income to the civilian economy.
The marketplaces are filled with mostly inexpensive Chinese-made goods, along with homemade products, farm produce, and scavenged scraps from dormant factories. The Kim regime has never looked kindly on these marketplaces, which stand as an indictment of the socialist ration system and compete with it. But markets must be tolerated because now that the PDS has collapsed, they are the only source of daily necessities for most people. In the markets, prices for formerly rationed staples, such as rice and cooking oil, are supposed to be controlled, but officials overseeing the markets can be bribed to look the other way.
In a society where people are supposed to live, work, and play under the watchful eye of the party, the markets provide a means of economic and social escape. Not only can people buy and sell what they want, but they can exchange information. Markets are also a school for capitalism. People learn about marketing, a woefully underdeveloped practice in socialist economies, where traditional consumer skills include discovering what stores have something to sell on a given day, how to bribe the store clerks, and how to combat the boredom of standing in line for hours. For all of these reasons, the Kim regime has tried to marginalize the markets. A Party Central Committee instruction sent out in October 2007 quotes Kim Jong-il as warning, “The market has degenerated into a place which eats away at the socialism of our own style … and [is] a birthplace of all sorts of non-socialist practices.”13
The July 1 economic measures officially recognized markets as necessary but tried to keep them within the controlled economy. More radical changes in the official view of markets took place in early 2003, when the government stopped referring to them as “farmer
s’ markets” and started calling them simply “markets,” an indication that items other than farm products could legally be sold. Shortly thereafter, the Democratic People’s Republic of Korea (DPRK) cabinet approved new regulations for the operation of markets.14 The regulations began with an assurance that Kim Jong-il himself had directed that markets be established in order to make the lives of citizens more “convenient.” The ministry of commerce was put in charge of authorizing markets and overseeing their operation. According to the new regulations, all markets should have a paved floor, a roof, and necessary storage and sanitation facilities. Their hours of operation should be set so that people could visit them in the evening after work. “Farm products, foodstuffs, daily necessities, and other commodities produced domestically or imported” could be sold, with the exception of certain “state-controlled items.” Ceiling prices would be set according to market conditions for such staples as rice, cooking oil, sugar, and seasonings. Sellers would pay fees for their stalls and be taxed on their earnings. “Illicit transactions” and “nonsocialist incidents” would be punished, although these terms were not defined, thus opening the way for market officials to levy fines and demand bribes at their own discretion.
With the government’s open recognition of markets, it was necessary to define them in a manner consistent with socialism. For example, the director of the State Planning Commission was quoted as saying that markets were “part of the socialist circulation of goods.”15 A vice director of the DPRK ministry of commerce explained that the use of markets was an “interim feature of a socialist society,” adding that the markets “do not at all mean that our socialist planned economy is being changed into a market economy or a free market economy.”16 Choson Sinbo referred to the new economic measures as “practical socialism” and insisted that even though other countries might view these measures as an adoption of capitalism, there was a “stark difference” between the North Korean measures and capitalism, presumably the fact that the markets were run by the state.17 Readers were assured that “although they are taking an unknown path, they [the North Korean authorities] know what they are doing.”
