North Korea: Economy at the Crossroads

The “hermit country” is one of many apt descriptors for the Democratic People’s Republic of Korea (also known as North Korea). A recent string of iron fist moves by the new supreme leader, Kim Jong-Un –including the public execution of some eighty citizens (including his own uncle) and inveterate attempts for developing missiles and nuclear weapons – has reaffirmed its path towards isolation. There have been tantalizing signs, however, that this regent is considering something of an open-door policy. Since 2011, Chairman Kim has pursued the establishment of over a dozen of economic development zones, encouraged family-based farming, and invited in foreign investors by normalizing the exchange of foreign currency in private markets.

Such seemingly aberrant policies from the last remaining communist dynasty are in fact a recommencement of the economic reforms that were alight from 1999 to 2003. And to most people, it was already a decided fate due to the disintegration of the Eastern-bloc, a stronghold for the North’s industrial architect, and the clobbering by natural disasters that led to the de facto collapse of the North’s state-socialist economy.

Much remains unclear about how far North Korea wishes to walk the fine line between a market economy and a planned socialist economy. To some, the country has followed, or at least attempted to follow the classic equation of a market economy – decentralized resource allocation, price arbitration by supply and demand, free market entry, and competition. Throughout the varying stages of reform, the government restructured much of the administrative structure of state-owned enterprises (SOEs). The “socialist goods exchange market” was introduced to permit SOEs to independently decide the means of exchanging goods at the market price, the self-accounting system was enacted to warrant SOEs’ greater autonomy. As a result, SOEs are now evaluated based on their profits than the execution of state plans. Farmers’ markets, the centrifugal force to the country’s marketization, too, were legalized, and even unleashed the birth of other municipal markets. As previously mentioned, efforts to recruit foreign investors to generate vibrant economic environment are swirling as well.

On the other hand, the new administration still has not let go of certain desires that would put a serious halt to marketization. In 2009, the North Korean government introduced a new currency, allowing the people to exchange their old money for new at a rate of 100 to 1 as a deliberate attempt to revamp the state planned economy by collecting money from the non-national sector. Even more telling  is that the government budget takes up over 60% of the national GDP, and the Central Bank in charge of the supply and demand of money operates largely under the commanded plan.

Unsurprisingly,  the North has chosen to focus on export-oriented growth by employing its cheap, disciplined labor and rich natural resources for realizing a successful transition to a market economy. This requires strong international cooperation which the North probably cannot cultivate in the current political atmosphere. Its obstinate stance on nuclear weapon development has triggered international criticism and severe sanctions. China no longer serves as the North’s safe haven as China’s own standoff with the U.S.-Japan alliance has pushed China to pursue a friendly relation with South Korea. In a nutshell, despite Commander Kim’s currency reform and semi-free market formation to attract foreign capital, a political environment with high security risks and low incentives for investment is probably detrimental enough to shoo capital inflows.

One stroke of luck for North Korea lies in that it is located at an economically dynamic center, having China, South Korea, Russia and Japan as its neighbors. As the North has an economically and politically deficient position to start with, the reform will presumably come slowly and with much confusion, and thus in desperate need for external assistance. Amidst the ever intensifying political tension in East Asia, the North’s construction of a healthy economic system could build momentum for breaking this tension and building more cooperative relations. It is unclear what North Korea will choose to do at this crossroad. Its commitment to impartial economic reforms through relatively loose foreign policies could be a cornerstone for upending its infamous history, and realizing peace both at home and abroad.