A Capitalist in North Korea

by Felix Abt

  My walks through Pyongyang during the day and night gave me glimpses into apartments, and therefore clues about daily life. Whether affluent or poor, North Koreans seemed to live simply and with few possessions. Although the size and quality of the predominantly state-owned houses varied according to the social status of the dwellers, a typical apartment had two cozy rooms plus a small kitchen not exceeding 30 square surface meters. In smaller cities and in the countryside, where there were more one-storey houses for families, the living rooms were slightly larger. As four to five family members often lived together, the living room was also used for sleeping. In less luxurious apartment blocks, dwellers shared toilets and showers, which were usually one each per floor.

  Items as diverse as war memorabilia and Japanese “Hello Kitty” bags were scattered around the rooms. To cope with frequent power cuts after nightfall, it was common to notice flashlights, candles and matches. When I was in charge of a pharmaceutical joint venture, we took advantage of that need by giving away small pocket flashlights as promotional gifts. They were quite a hit, a small gadget that solved a regular problem for North Koreans.

  Blankets were another household item, providing warmth during the harsh winters. The walls were usually covered with rough wallpaper from recycled paper and floors used to be covered by paper. But they’re now more often covered with plastic like vinyl, which is cheaper than hardwood, tiles, or carpets, and more durable and easy to keep clean.

  Most homes do not yet have a telephone. According to 2011 statistics, there were 1.1 million fixed-line phones installed in this country of 24 million inhabitants. They are predominantly used in government offices, state-owned enterprises and collective farms. The country has been considered a technology backwater and I have come across hand-cranked phones for communications in a number of facilities.

  However, three years after the launch in 2008 of a telecom joint venture’s 3G cell phone network, it hit 1 million subscribers. According to a study of the U.S. based Nautilus Institute for Security and Sustainability 60 percent of Pyongyang residents aged 20 to 50 now use cell phones. The photo (left) shows a boy with his dad busy on his mobile phone and teenagers (right) that do not (yet) have a cell phone using a public phone booth.

  Like the country itself, apartments were kept meticulously clean. Until the 1990s a so-called “sanitation month” was proclaimed by the government twice a year, during which all homes had to be repaired and scrubbed down. Now, campaigns are less frequently held and less followed, but homes are still amazingly tidy given the shortage of water and detergent.

  Everything had a cover: a cover for the radio, the fan, the sewing machine and for the television, often beautifully embroidered as many North Korean women have learnt to embroider during their childhood. A large number of dwellers used to embellish their homes not only with embroidery but also with potted houseplants and even aquariums with various kinds of fish. For a country better known for its food shortages than for its livability, there are specialized shops that are popular selling aquariums, accessories, and fish. It was not the North Korea I saw on CNN. Nor was it the “heart of darkness” that I anxiously awaited ten years ago.

  Chapter 2:

  Malaise into Opportunity

  “When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.” — John F. Kennedy

  How did North Korea get where it is today, carrying through the end of the Cold War, a devastating famine and remaining a bastion of communism in a world rapidly turning to the free market?

  In the 1960s there were only two industrialized countries in Asia: Japan and the Democratic People’s Republic of Korea. The latter was founded in 1948 on the ashes of Japanese occupation from 1910 to 1945, following the devastation of World War II. But despite all the destruction and mayhem, socialist North Korea managed to prop up one of Asia’s fastest growing economies from the 1950s until the beginning of the 1970s. For a long time, the country’s growth and gross domestic product (GDP) per capita rivaled that of capitalist South Korea’s, which for a long time was debilitated, agrarian and fractious.

  North Korea, we all know, bolsters a mainly state-run economy, with all bodies reporting to one of three national pillars: the Korean Workers’ Party, the Korean People’s Army, and the Council of Ministers headed by the prime ministers. But more interesting are the North Korean companies that resemble the South Korean chaebol, conglomerates like Samsung and Hyundai. The government oversees some 200 businesses that, by North Korean standards, would be considered medium and large enterprises, employing at least a few hundred but in some cases more than 10,000 employees.

  Some groups, such as the Korea Sonbong Export & Import Company (exporting marine products and importing foodstuffs) and the Korea SEK Company (exporting cartoon films on order and importing movies and fine art materials), are more focused on a handful of core operations. Other conglomerates have diversified into a wide range of non-core business activities, such as the Korea Rungrado General Trading Corporation (Sindok spring water, marine products, knitwear, clothes, metallic and non-metallic minerals, natural shell buttons) and the Korea Kwangmyong Trading Group (agricultural produce, marine products, vessel equipment, non-metallic minerals, clothes, essential oil, processed jewels).

  Although diversification tends to be wasteful, companies added business lines partly as a measure to diversify risks in economically uncertain times “due to hostile foreign forces.” They were also allowed to compete with others, which was also seen as a countermeasure against waste, as Mr. Ham, a senior official of the State Planning Committee, explained to me. In short, they didn’t want to have “all their eggs in one basket” in case a crisis emerged.

  With the support of the Korean residents living in Japan since the time of the Japanese colonization, Kim Il Sung founded the country’s largest conglomerate, the Korea Daesong Trading Group. Today it continues to operate under party provision. Daesong was to become a model group for the rest of the North Korean companies, dabbling in a kaleidoscope of sectors like mining, light industrial factories, ginseng cultivation, shops and even a large and well-managed ostrich farm which I visited. Like the South Korean chaebol, Daesong also has its own bank that’s set up as a separate business unit, but that helps finance its vast operations.

  During the first few decades of its existence the DPRK boasted significant development progress with fast electrification and mechanization. By 1984 the state had 6 to 7 tractors per 100 hectares. It also saw widespread “chemicalization”—that is, more widely used fertilizers and pesticides in agriculture and land irrigation, which increased from 227,000 hectares in 1954 to 1.2 million hectares in 1988.1

  As there were no economic incentives to flee to South Korea, defectors rarely ran off during that period. Among the South Koreans who defected to the North, Ri Sung Gi and Choe Deok Sin have been the most famous ones. Ri, a chemist, ran away in 1950 and was later accused of being involved in North Korea’s nuclear weapons programs, when he headed the North Korean Atomic Energy Research Institute. He also played a leading role in setting up the massive Vinalon Complex in Hamhung which became a symbol of national pride and a living example to North Koreans that Juche became reality.

  The DPRK-produced Vinylon, also known as “Juche fiber,” that was produced there, has become the national fiber of North Korea and has been used for the majority of textiles. It has outstripped the use of cotton and nylon. Choe was a South Korean foreign minister who defected in 1986 with his wife to North Korea.

  Other prominent defectors were O Kil Nam, a South Korean economist who defected with his family in 1985 to Pyongyang and asked for political asylum in Denmark one year later. The final one was Ryu Mi Yong, current chairwoman of the North Korean Chondoist Chongu Party who defected in 1985 with her husband to Pyongyang.

  Patching up the economy

  Things took a dramatic turn downward in the 1980s, when North Korea’s annual growth dro
pped substantially to a modest 3% per year on average. In the 1990s, the country suffered a further setback when its economy shrank by an annual average of about 4%. Most scholars attribute the collapse to the fall of the Soviet Union and Eastern European states, who offered food and fuel subsidies to the regime. Combine that with the huge natural calamities such as a drought in the 1990s and, last but not least, structural problems like its obsolete, underinvested state economy.

  While global geopolitical changes in the 1980s kick started China and Vietnam on the road to economic reform, North Korea lagged. There were three reasons why the DPRK was less willing to reform than China and Vietnam. First, the U.S. refused to sign a peace treaty with the DPRK, which made the country feel threatened and froze it in a militarized, defense-oriented state. Second, Vietnam was reunited in 1975 and mainland China was also a single entity (aside from Hong Kong, Macao and Taiwan). Unlike North Korea, China and Vietnam did not face a significant external political threat, which allowed them to open up gradually without fear of overthrow.

  Chinese leaders like to remind their North Korean colleagues of this history, because it’s part of Beijing’s hopes to put North Korea on a Chinese growth model. At diplomatic meetings, they explain to North Koreans that the socialist countries in Eastern Europe collapsed because of a reluctance to reform, whereas Vietnam and China undertook the pragmatic even if unpopular changes. The official line is that the reforms led them on a path to development, prosperity and strength. In the eyes of the Vietnamese and Chinese neighbors, socialist countries like North Korea and Cuba need to make up their minds quickly.

  One analysis by the Bank of America-Merrill Lynch, published in early 2012, argues that serious economic reforms would most likely trigger an annual growth rate of 10 to 12 percent—a remarkably high average that exceeds the roughly annual growth of 5 to 8 percent in China and Vietnam. The firm further noted that liberalization would close the income gap between “rich” South Korea and “poor” North Korea.

  In 40 years, North Korea may be just over three times poorer than its southern neighbor, compared to 40 times poorer if no changes are enacted soon. The report added that the DPRK can achieve this goal if it follows the steps of other emerging economies that decided to join the global economy. It also said that market opening does not necessarily lead to reunification, as the North may opt for a partial open market system like China.

  Western advice to the North Koreans is suspected as a sugar-coated plot to overthrow the socialist system, in particular during periods when tensions with the U.S. and South Korea are high. Still, in my own private discussions with senior cadres, they admitted the need to “learn from other countries and adopt elements from them that are beneficial for our country.”

  Lately, reform-minded cadres have been getting a new boost from “Kim Jong Un, who has an interest in the knowledge economy and is carefully watching economic reforms in various countries, including China” Yang Hyong Sop, vice chairman of the Supreme People’s Assembly told the Associated Press in a rare interview on January 16, 2012.

  North Korea’s official economy began a modest recovery in the 2000s, but annual average growth was meager at 1.5 percent per year during the 2000s. Like in countless poor countries, the informal or “shadow” economy without a doubt grew multi-fold during the same period. In the absence of reliable statistics, the figures I’ve compiled from different sources, combined with my on-the-ground observations, are merely approximations and not pinpoint accuracies. But being in the field, I’ve captured economic trends that the statistics don’t fully reveal. There are emerging bicycle repair spots across the country and more people selling cigarettes, drinks, food and other goods along streets outside the capital.

  But number-crunching didn’t encapsulate the breadth of what was going on. In February 2012, for instance, the South Korean Hyundai Research Institute reported that North Korea’s GDP grew the previous year by a surprising 4.7 percent from a year earlier. Take the figure with a grain of salt. It was based on the think-tank’s calculations of grain production, which according to the UN Food and Agriculture Organization grew by 7.2 percent from the previous year.

  Combine that, the organization argued, with a lower infant mortality rate—a combination of trends that, from an economist’s standpoint, signify growing per-capita income and prosperity. The country’s heightened efforts to meet its goal of building “a strong and prosperous nation by 2012” was another cause for this growth rate, although it’ll be unsustainable without economic reforms. There were other chance factors, like a good harvest that year, and the efforts made in preparation for Kim Il Sung’s birthday.

  The world’s most rigidly centrally planned economy seems to have no end in sight for its severe economic problems. Chronic underinvestment from both foreign investors and the government led to an industrial capital stock run down to a critical level. Over the past two decades, countless factories have closed; those that continue to run often do so at low-level capacities, thanks to a shortage of raw materials. (North Korea is resource-rich, but the country needs heavy investment to exploit the metals and minerals, as well as foreign equipment and spare parts).

  Add that to chronic electricity shortages, and economic prospects get even worse; the lack of electrical power is the largest bottleneck to any industrial development of North Korea. I have visited provincial factories far from the capital, where workers sleep in the factory at night so they can wait for sudden electrical bursts. When the power came back and the lights went on, the workers jumped to their feet to operate the machines for a couple of hours until the next blackout. They’d sometimes go without electricity for the remainder of the day.

  Historically, North Korea had difficulties propping up its industrial economy without sufficient electricity, but the situation was always better before the Cold War ended. Thanks to flooding, hydropower generation dramatically dropped until the mid-1990s. In addition, the coal supply declined and wasn’t enough to feed thermal power plants, because of the end of Soviet subsidies and because many coal mines were flooded in the 1990s.

  In the late 1980s, North Korea generated its peak electricity output, estimated at 30 terrawatt-hours. (1 terrawatt-hours is 1 billion kilowatt-hours, the equivalent of the amount of energy that is produced by a 1 million megawatt generator over a period of 1 hour).

  Surprisingly, the World Resources Institute estimated in 2010 that North Korea’s Electricity Consumption per capita (kWh/year) was 600 to 800 compared to 402 in India, and merely 74 in Myanmar. The estimates seemed impressive, but flawed. They may be based on nominal electricity generation and distribution capacities, versus a much lower actual electricity production and distribution. About two-thirds of the power came from dams built mostly under Japanese rule, and the remaining from coal plants—which adds up to a decent output, but not enough.

  In the 1990s, the total power production dropped below 20 TWh according to most estimates. At ABB, a firm I represented working on power technologies suggested the loss of power during transformation and distribution amounted to up to 25 percent. We recommended the Ministry of Energy Production and Coal Industry to allocate more resources for fixing up the country’s electrical infrastructure. The approach was far more cost-effective than adding new power stations, and total savings would have corresponded to a substantial double-digit percentage.

  Logistics (or the lack of it) has as much to do with North Korea’s food shortages as with power shortages. North Korea is home to hundreds of thousands of what were once pristine agricultural machines and trucks as mechanization of the agriculture as well as modern transportation (in addition to electrification) was one of Kim Il Sung’s most important goals for the socialist country. After the 1990s, they fell into disrepair. Many are still out of order, and the country can’t get enough spare parts or fuel. A team of foreign experts from the Swiss Development and Cooperation Agency and NGOs estimated that up to 20 percent of the annual harvest rots in the fields never reached consume
rs in the cities—making the food shortages of the 1990s even worse.

  Throughout the 2000s, the state-led business sector has been trying to repair and set up new power stations. The situation today has improved over a decade ago, when I arrived in North Korea. Several power stations are being built along the Huichon River and, after 11 years of construction, the largest one with a power capacity of 300,000 kilowatts was completed in 2012. Pyongyang is the main beneficiary, and it will suffer from fewer blackouts as a result. The dams will help protect cultivated land and residential areas along the river that have been regularly flooded in the past, helping bring about devastating food shortages. But the total power output remains substantially below the record output at the end of the 1980s, and it’s not clear when or if the nation will return to those days.

  Satellite pictures of the Korean peninsula in 1992 (left) and 2008 (right) at night show a light gap, reflecting poverty and lack of industry. North Korea is plunged into darkness and South Korea is lit up. South Korea and Chinese border provinces have rapidly industrialized, making these lights a great measure of the economy. Source: http://aidwatchers.com/2011/01/cool-maps-measuring-growth-from-outer-space/.

  North Korea’s ailments partially grow out of its “military first” policy, which gobbles up expenditures that could go to infrastructure and education, but instead puts them in the hands of the nation’s defenders. The U.S. government puts forward figures, probably exaggerated, suggesting that North Korea is the world’s most militarized country: about a million people, or 20 percent of men aged 17 to 54 serve in the regular armed forces. That number doesn’t include the substantial reserve force of 7 to 8 million soldiers out of a total population of 24 million, basically every person in their 20s and 30s ready to fight at a moment’s notice. And, in addition to being a strong deterrent for potential aggressors, a nuclear arsenal is relatively cost-effective compared to the legions of obsolete weaponry and a massive defense force, a senior party official explained to me.