A Capitalist in North Korea

by Felix Abt

  The currency reform in December 2009 was aimed at curbing inflation, tackling corruption and reducing the power of the emerging merchant class. Money in the old currency had to be changed into money of the new currency at a rate of 100 to 1. But only a small amount could be changed which means savings beyond the limited amount were gone. Although salaries remained unchanged and were after the currency a hundred times higher, hoarding and a sudden huge purchasing power versus the same quantity of products available led to another huge inflation expressed by soaring food prices. In March 2010, Pak Nam Gi, the secretary of the planning and finance department of the Workers Party, held responsible for the disastrous result, was shot by a fire squad according to the South Korean news agency Yonhap.

  Responding to the imbroglio in May 2010, the state lifted all the restrictions on private trade it had introduced between 2005 and 2009, and a new period of liberalization followed. These developments have completely escaped the attention of conservative American outlets like the Heritage Foundation and The Wall Street Journal, when, in their 2011 annual index of economic freedom, they placed North Korean economic freedoms low and unchanged from 1995 to 2005. From 2005 to 2011, the ranking dropped even further, from 10 points out of 40 to almost zero. Obviously, these talking heads made an ideological decision.

  Economic development at different speeds: the lady with stroller and fashionable leather rucksack comes from an emerging middle-class, juxtaposed with the older, more traditional man on the right.

  Although socialist China and Vietnam have very successfully carried out reforms while keeping their communist parties in power, they went through the same jutting backwards and forwards movements. Until 2003, economic reforms were widely discussed in China and there was a sort of a consensus that state monopolies or oligopolies should be reduced. That would allow the private sector to develop.

  The discussions have died down since then, and reforms have halted. A couple of private Chinese entrepreneurs told me that it has become more difficult for private enterprises to get bank loans. It may take a while until enough pressure has built up to get another round of reforms going.

  But unlike in China and Vietnam, reforms in North Korea are very much either accelerated or slowed down according to the political environment. The July 2002 “reforms,” quite bold by North Korean standards, were prepared when the U.S. President Clinton’s administration started engaging more seriously with this country. The Bush administration, however, made a U-turn. It not only refused engagement, but labeled the Democratic People’s Republic of Korea as a member of the “axis of evil” and a target to be destroyed.

  The then-politically incorrect word reform was not used and they called them the “July 1 Economic improvement and management measures,” because they were introduced on July 1, 2002. They were meant to further monetize the economy by abolishing the coupon system for food rations. The new policy also allowed supply and demand to determine prices of most products. It also depreciated the artificially high value of the domestic currency to a level close to black (real) market value to make North Korea more attractive for foreign investment.

  To attract even more foreign investment, the government promoted special administrative and industrial zones to attract foreign investment, such as the Sinuiju Special Administrative Zone. Farmers’ markets were legalized and allowed to transform into general markets. Other measures shifted managerial competence for enterprises and state farms from the central party to the local production units, which could no longer rely on state subsidies. They also had to cope with their own tough budget constraints from then on.

  In addition, the conservative administration of Lee Myung-bak, which came to power in South Korea in 2008, abolished the pro-engagement “sunshine” policy of its predecessors, and halted all aid to the north—a move that threw its leadership into disorder. The new catchphrases seemed intended to isolate, throttle and corner a regime that was legitimately on the path to reform. Sunshine allowed family reunions, South Koreans to visit North Korea, the set-up of the Kaesong Industrial Zone and the preparation of a host of other projects that brought hostile North and South closer together and made the Korean peninsula safer.

  Thanks to American and South Korean threats, the Korean Workers’ Party had to give emphasis to protecting its borders more than economic reform. Of course, this country under siege was quite wary when it came to reforms and it was not surprising for me anymore when the Rodong Sinmun, the central organ of the Korean Workers’ Party called reforms “sugar-coated poison” by the imperialists aimed at undermining the socialist system.

  When the U.S. started accusing North Korea of working on a nuclear weapons program three months after launching its July 1 reforms, it put on more and more pressure on Pyongyang to reform itself. North Korea suspected the advice of being part of a plot to overthrow its system.

  And yet, there had been many changes which were not called “reforms” in North Korea. They were hardly noticeable for outsiders or even for expatriates living in Pyongyang but they were still quite significant for this country. Here are some of the more important changes:

  According to the DPRK’s Daean management system a factory management committee, headed not by the CEO, but by the party secretary, had to run an enterprise in the past. In 2002, however, the role of the CEO was upgraded and the CEO became the responsible chief executive of the enterprise. Factories were headed by the party secretary and a committee. The party secretary was a politician, not a technocrat, and would usually not have the background to run a business. The committee he headed also diluted responsibilities. From then on, a competent technocrat alone with no bureaucratic committee would be in charge.

  Also, after the July 2002 measures, agricultural markets were allowed to transform into markets that peddled pretty much everything, and those existing before, became now legalized. Soon after, all kinds of industrial products were sold in these markets for the growing number of private merchants.

  It did not take long until additional street markets appeared, and more individual vendors emerged roaming living areas with their goods as well. Of course, the state economy started degrading in the eighties and collapsed, together with the public rationing and distribution system to a large extent in the nineties when informal, illegal market activities emerged. The 2002 measures were partly meant to get some control back over these markets and to revive the state sector.

  Pyongyang’s most prominent shopping zone, the Tongil (reunification) market with a whopping 7,000-square-metre hall, was opened in 2003. That was about one year after the state passed its July 2002 market measures, causing the number of stalls to flourish in all sectors, such as meat, fish, vegetables, clothes, cosmetics and washing machines—to name a few. Pictured above is Toni Hauswirth, the manager of a flour mill in Indonesia owned by a large family business empire on the decline. The quasi-dynasty sold its flour business and threw away its DPRK investments.

  In 2002, the state let go of its fixed prices for rice and foodstuffs, which rose to the market levels. The government correspondingly increased salaries to make up for the rising commodity prices. But the dramatic salary increases created a flush of cash injected into the economy, creating an enormous demand for products and services that the state sector, with its low productivity, could not meet. As a consequence, inflation sky-rocketed to 100% year-on-year.

  Private citizens found ways to circumvent the state sector and make up for inflation. They typically found second side jobs, such as by setting up their own businesses. To keep their state employers happy, they shared the profits with those enterprises under which they operated. For outsiders, this set-up inevitably stoked confusion. I have done business with many companies, all formally belonging to state entities, but I could not figure out for certain whether the managers were acting as government employees or actual business owners. Only few would admit that they worked for their own interests; the majority deemed it wiser to be discreet with this legally delicate quest
ion.

  The economic changes, of course, brought out fundamental changes in the desires of the North Korean people. Students usually saw the most prestige in working for the foreign or trade ministries, but suddenly spoke favorably to me about becoming business people. The merchant class was, in this socialist country, despised in both the Confucian and revolutionary past.

  Indeed, over the years, more students came to visit foreign business booths at exhibitions in Pyongyang. At first, they usually wanted to practice English. But they expressed to me their wish to work for a foreign company, or a prominent local one involved in the import-export industry.

  Even the country’s legal system no longer had the reach to rein in market activities. The Socialist Property Management Law of 1996, for instance, allowed only “enterprises, institutes and groups” to use properties that were affiliated with the government. Still, in the 1990s and early 2000s, real estate swapping and trading discreetly emerged. Mr. Pak, an official at the Ministry of Light Industries, told me that he was happy to be able to get a better apartment by swapping with another person, and then by paying for the difference in market value.

  “Market value?” I inquired over a coffee in my office.

  “Since there are more and more apartments and houses sold and bought, one can know how much people are prepared to pay for one,” he answered.

  Decades earlier, this individual had lived with his wife, children and parents in an apartment allocated by his father’s work organization. It was quite a hike, at one and a half hours away from his office. From his new residence, he now could reach his ministry on foot in just a few minutes.

  Tactics like this could be considered what the historian James C. Scott calls “weapons of the weak,” or the endeavors of regular people to skirt around officialdom and determine the course of their own lives. Indeed, the North Korean people subtly forced the government to change its ways: the informal property market led the state to pass the new Real Estate Management Law, adopted in 2009 and including individuals in addition to organizations.

  The rise of a business-minded technocratic class is also changing things for the better. In the early 1990s, when the former Soviet Union and allied Eastern Europe underwent a rapid metamorphosis, North Korea recalled all its overseas students to protect them from “poisonous” influences of reform. A little more than a decade later, business-educated leaders are increasingly at the forefront: officials repeatedly told me that they received degrees in Hungary sponsored by the George Soros Foundation, in England, in Germany or elsewhere.

  One example is Dr. Kim, a senior official at the Foreign Trade Ministry, who had received his MBA at a British university. This intellectual and career-driven fellow was always churning out business and investment proposals, presented in a professional way to me and other foreigners. Studying at a foreign university was no longer off limits, but a trend among upper class North Koreans.

  But the students didn’t always leave the country. In other cases, British and German professors were brought in to train students at the nascent and blossoming universities. Consider my own project, the Pyongyang Business School, which would have been unthinkable had I gone on the endeavor 10 years earlier. Yet the authorities conceded that it was more cost-effective and less risky to recruit students for training with foreign lecturers in Pyongyang, rather than moving abroad.

  On behalf of Sandvik, a multinational firm focusing on mining equipment, I organized seminars for mines—of which North Korea had plenty. I did the same for other companies such as Dystar, the global leader in dye stuff. At seminars for this company, representatives of garment producers from all over the country came to Pyongyang.

  Though they wanted to learn about state-of-the-art science, the participants also became familiar with key products and how to use them optimally. Afterwards, some North Korean delegates became customers of these companies. The specter that foreign capitalist companies could talk directly to North Koreans, even from those outside of Pyongyang, would have been inconceivable a few years earlier.

  The changes most visible to foreigners in Pyongyang could be recognized on Pyongyang’s streets. Over the years people became better dressed, wearing more bright, colorful and fashionable clothing, compared to when I arrived in 2002 when they wore dark clothes that were black, olive green and blue. The “dark” fashion was economical at first: it was easier to keep them clean, unlike the clothes with lighter colors. Most people had no washing machines and needed to wash clothes by hand instead with a cheap soap.

  In 2005, I noticed a wave of young women in Pyongyang wearing platform shoes, a style that made its way from the en vogue circles in China and Europe. The following year, the first tranche of local women wearing foreign luxury brands emerged. They even patted their faces with good doses of makeup, and donned jewelry.

  That growth in cosmopolitan styles corresponded with an increasing number of cars driving around the once-half empty streets. Many of them belonged to state entities, but gradually more were actually the possessions of the newly emerging middle class who were using state agencies for their private business. It looked like a typical Asian route of economic development with the use of state enterprises. They were then called “umbrellas” for protection and for private gain, and were a centerpiece in China and Vietnam too.

  At the Pyongyang Business School, female bank executives attend to listen to a lecture from Andreas Kuehnis, the head of commercial banking for the Asia-Pacific at Credit Suisse, and myself. Just a few years earlier, their dresses would have been darker and more rank-and-file. But now they ported more diverse and colorful clothing that seemed business-oriented. The picture was taken in the countryside on a boat, on a lake adjacent to the guesthouse where I organized the seminar.

  Old meets new: three DHL courier vans drive in front of the Foreign Trade Ministry. The building’s façade is adorned on the far left by a large painting of Karl Marx, and on the right with a portrait of Lenin. Yet their literature can no longer be found in libraries and book shops, and I never came across a single quote of theirs. It was a clear hint that North Korea did not want an international but its own national brand of socialism mixed with Juche and Songun-ideologies which had nothing to do with Marxism-Leninism any more. The highly visible yellow DHL vehicles, however, seemed, at times, to be just everywhere in Pyongyang.

  While DHL is still in Pyongyang, Marx and Lenin have gone and can, therefore, not be seen on walls of this building as of spring 2012. Although of huge historical significance, in April 2009, the Supreme People’s Assembly quietly removed the word “Communism” from articles 29 and 40 of the constitution, covering the economy and culture, respectively. It added “Songun” (Military-first policy) instead.

  This looks as if North Korea is to follow the political path of the former military regime of Myanmar rather than China’s economic regime. General Ne Win installed a nominally socialist military government with the task of following the Burmese Way to Socialism after his coup d’état in 1962.

  Rise and fall of a technocrat

  North Korea pundits and Western media called Pak Pong Ju, North Korea’s prime minister from 2003 – 2007, a reformer although it’s hard to put a precise label on these leaders. He was a star figure who was replaced in 2007, a move that many interpreted as meaning North Korea was reverting on its earlier reforms. Pak was born in 1939 and started his career as a manager of a food factory in the North Pyongan province (no relation to the similar-sounding city of Pyongyang). He later was appointed party secretary at a Chemical Complex and then moved on to become party manager of the DPRK’s chemical industries.

  During the 1990s, North Korea’s most powerful party officials were Kim Jong Il, his sister Kim Kyong Hui, and her husband Jang Song Taek. Pak managed to get into Kim Kyong Hui’s good graces, and eventually rose to the rank of her first deputy at the party central committee. His ministerial post was ended in 2007. But he returned in August 2010 to become her deputy again. The New York Times was
quick to publish a headline reading, “North Korea Reinstates Market-Oriented Official.” The reporter speculated, “A former North Korean prime minister who was banished three years ago for pushing market-oriented reforms too far has returned to the center of economic policy, leading to speculation that the nation’s leader, Kim Jong-il, might give such proposals a second chance.”

  The paper went on to quote a South Korean defense analyst as saying: “Pak’s reinstatement indicates that North Korea is shifting back to market reforms, even if grudgingly, after its botched attempt to re-enforce state control on the economy,” referring to the failed currency reform the previous year.

  Still, even if Pak Pong Ju was a reformer, his 2007 replacement may have been unfairly maligned as a conservative. Prime Minister Kim Yong Il (not to be mistaken for Kim Jong Il, the supreme leader), as he was known, was Pak’s Minister for Land and Marine Transport, and the chairman of the Korean-Polish Shipping Joint Venture company called Chopol, run together by a Korean and a Polish executive. The Polish head, who was a committee member of the European Business Association in Pyongyang, told me that the new prime minister was a very competent and supportive chairman—and that he had a good understanding of business. He was not a staunch Marxist-Leninist, as the press made many believe. He was as much in favor or against reforms as his predecessor.

  The narrative that North Korea carried out reforms under Pak, then retrenched away from them, and then moved back towards them, was an illusion. Had the Western media known Pak’s successor, their still speculative headlines might have read: “North Korea replaces market-oriented prime minister by another market-oriented prime minister.” But this headline would not have signified anything newsworthy, so they would have probably glossed over this minutia.