Kim and Yang and Lankov on the Rise of the Informal Economy



We are currently in a holding pattern, waiting to find out whether the closure of Kaesong, multilateral and bilateral sanctions and the designation of North Korea as a jurisdiction of money-laundering concern will have significant material effect on the economy. An important issue going forward will be whether the process that we call “marketization from below” is a source of economic and political resilience or whether these activities will also be vulnerable to mounting external constraints, and with what effects. The answer is likely “both,” but understanding the operation of the emerging private sector is more and more significant for understanding the North Korean economy as a whole and thus the leadership’s options.

Last year, the Korea Institute for National Unification published a useful overview called  The Growth of the Informal Economy by Kim Suk-Jin and Yang Moon-Soo, drawing on an array of both Korean and foreign sources. The term “informal economy” was chosen self-consciously to connect North Korean developments with the growth of the informal sector in other developing economies. Despite the quite obvious differences of a fraying state-socialist order, many of the defining characteristics of informal sectors elsewhere are clearly present in the North as well, most notably in small proprietorships, operating outside the reach of the law, or more accurately running to stay outside of it.

Kim and Yang trace the emergence of the informal economy to the early consumer goods markets, but note how labor markets and even financial markets have emerged along the way as well. In addition, the state effectively legalized limited producer goods markets among state-owned enterprises in the early 2000s as the planning system broke down.

Along with the markets has come a process of de facto privatization, and not simply in the emergence of household business ownership. Kim and Yang also note the growing importance of hybrid forms: partnership contracts or “loan investments” in which private capital provides investment loans to state-owned enterprises; and the closely related leasing of state assets by SOE managers to private managers that effectively run the companies.

Kim and Yang provide a particularly useful chronology of the ups and downs of state regulation, including efforts by the security apparatus to survey these activities and to shut them down in 2008-9. But they note the partial legalization of workers operating outside of their assigned work unit and allowing so called “duhbuhri,” a private business activity that uses state-owned enterprise assets in return for rental payments. They also argue that at the end of the Kim Jong Il era, the Enterprise Act (adopted and promulgated in November 2010 as Decree No. 1194 by the Presidium of the Supreme People’s Assembly) actually provided more legal cover for independent organizations than is frequently realized.  

The study closes with some case studies of food distribution and processing—probably the original informal activity during the famine—foreign trade, transport, and communication; a central theme is the centrality of services—typically underprovided in state-socialist systems—to the new economy.

Of particular interest is their description of how trading companies actually work in the North. Given the lack of competitiveness of state-sector firms, trading companies collect goods for export through a process called “source mobilization,” for example buying fish from collectives that are in fact effectively privatized themselves. The private sector enters as the source of funds for these purchases. The trading companies also engage not only in wholesale but in retail trade of imported goods, as a result blurring the distinction between the formal and informal trading sector and providing the node for the leakage of foreign exchange into informal markets.

These processes are facilitated by the growth of the informal transportation industry, including not only local “servi-cha” operations but even inter-city bus routes. Although they do not offer an estimate of the size of these activities, the clear thrust of the Kim and Yang analysis is that it is far too late to put the genii back in the bottle.

More recently, the Carnegie Moscow Center has released a parallel report by the indefatigable Andrei Lankov entitled The Resurgence of a Market Economy in North Korea. Lankov’s account is stronger on the political economy of the marketization process, in which corruption and bribery are absolutely central. He argues that the process has occurred as a result of acquiescence rather than through codified reforms.

Lankov provides one of the first estimates I have seen on the size of the informal economy (from Yi Sŏk-ki et al., Pukhan kyŏngche chaengchŏm punsŏk [An analysis of controversial issues in North Korean economic studies]. Seoul: Sanŏp yŏnkuwon, 2013): that the informal economy could account for 30-50 percent of GDP. This estimate strikes me as high given continued state control over agricultural cooperatives and collectives and a number of commanding-heights sectors such as power. And there is always the question of how the military and military industrial complex fits into the equation. But the estimate depends in part on how hybrid activities are counted too; some significant portion of the SOE sector may already be de facto privatized and if included, the lower end of this range could be plausible.

Lankov walks through a similar list of causal forces at work, but adds interesting detail along the way. For example, he claims that the inter-city bus system was effectively privatized as early as the late-1990s and was a model of the “funding squad” approach, with companies exploiting their legal status to buy cars and buses from China, but drawing on private capital to do so.

Another fascinating set of numbers comes from estimates Lankov cites on the booming Pyongyang property market: “Prices for Pyongyang apartments have increased five- to tenfold [since 2000]. A decent two- or three-bedroom apartment may cost as much as $70,000–$80,000, while luxury three-bedroom apartments are being sold for $150,000–$180,000.” Given the absence of institutionalized mortgage markets, these figures are indicative of the wealth of the nouveau riche.

Lankov is extremely well-attuned to the culture of the new class. In addition to the emergence of a luxury service sector, including restaurants, he notes that “a good private teacher of English, music, or even math can now earn a comfortable income” and that the new class has spawned catering and home renovation businesses and even a private entertainment sector for parties. He notes the emergence of striking inequalities, claiming that it is now possible to buy a $1000 purse in Pyongyang, a multiple of the annual average income for the country.

But Lankov is less than clear on the political effects of the new economy. Yes, the public is exposed to the fact that North Korea is not a workers’ paradise. But at the same time, those most cognizant of this fact are precisely the beneficiaries of the new order. As I have argued before, don’t believe that the marketization process dissolves authoritarian rule; as Martin Dimitrov among others have argued, it could just as well be a source of authoritarian persistence. The crucial issue looking forward: what will happen if this private activity is squeezed by sanctions? Could pressure mount to liberalize further or even reverse commitments to nuclear weapons? Or would the regime revert to controls, and with what political economy effects? These are going to be the most significant questions for analysts of the North Korean political economy over the next six months and beyond. 

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