Park Hyeong-jung on the Course of Economic Reform (Part I)

January 8, 2014 9:30 AM

Park Hyeong-jung of the Korean Institute for National Unification has written by far the most sophisticated analysis on the course of economic reform under Kim Jong Un. This must-read piece, which appeared in the most recent issue of Korea Focus, puts together all of the information we have in a coherent framework. Park's conclusions are:

  • There was in fact a fairly serious—if incremental—reform effort contemplated within the government, piloted and even partially implemented;
  • The effort faced three inter-related problems: the inevitable "rollout" problems that occur with large-scale policy initiatives anywhere (see Obamacare); the failure of the measures to deliver short-term benefits, and evidence that they may have had inflationary consequences; and political economy factors in the form of resistance from entrenched interests within the state and military.

We can do little better than to summarize and comment on his piece, and we do so in three steps: today, we look at the course of the reform effort; tomorrow, we look at the backlash, and apparent unraveling of the effort and the prospects that it might get picked up again in the post-Jang environment. In a third post, we place Park's analysis in the context of the new push on foreign direct investment, and ask how this might constitute a substitute or complement to the reform effort.

Some background: in August 2012, we—along with many other North Korea watchers—sought to make sense of several possible reform initiatives. The so-called "June 28 directive"--"On the Establishment of a New Economic Management System in our Own Way"—received particular attention from those believing that Kim Jong Un heralded a new order. Then the waiting started, as the Supreme People's Assembly meeting of September failed to provide any glimmers of hope, the New Year's address was absorbed with the heroics of the satellite launch, and conditions on the peninsula fell to new lows in the early spring of last year. It was possible that reform was occurring via pilot projects, but the North Korean press was largely silent on the issue and the anecdotal accounts from sources such as the Voice of America, DailyNK, and the Korean Institute for National Unification (KINU) painted contradictory pictures of what was happening. The regime appeared to drift back to white elephant projects, like the Masik Pass ski resort and the rhetoric of mobilizational campaigns. By the end of the year, few seemed to believe that any reform was in play; in its most recent report, for example, the World Food Program was uncharacteristically blunt about the lack of progress in the agricultural sector. Most assessments of the New Year's 2014 speech—including ours—noted the absence of anything that could even be read as a proxy for reform.

Park suggests a more complex picture. Drawing on both public sources and "North Korea's official documents," Park claims that Kim Jong Un formed a cabinet-level working group—related to the concept of "cabinet responsibility"—to formulate plans for a new style of management. The June 28 measures were backed by quite substantial detail, and marked incremental but nonetheless quite significant reforms. The plan was to educate cadre and management about the reforms over the course of the summer and then to start rolling them out in pilot or in full starting in October. The measures are best understood by dividing them into reforms of the state-owned enterprise (SOE) sector and the cooperatives.

The SOE Sector

Gradual reforms of state socialist economies do not start with privatization or even full introduction of markets, but rather seek to decentralize and delegate more responsibility to enterprise managers and cooperatives and hold them accountable for performance through various mechanisms. The North Korean variant kept firms in state hands, maintained control over hiring and firing of managers, and prohibited formation of private enterprises. It also retained an indicative planning process in which the goods to be produced would be dictated from the center. However:

  • Factories would make their own production plans, including pricing of output and distribution and distribution of profits over required taxes (30% of profits) to the state;
  • Firms would be given leeway—indeed required—to secure intermediates and inputs from other firms, creating a quasi-market among enterprises. One innovation that would retain a certain degree of state control was the formation of new "direct supply centers" that would provide certain inputs as well as food.
  • In an innovation we had not seen, Park claims that firms would have been required to feed their own workers and that the public distribution system would be shut down. However, the state would control prices, including preferential ones for groups such as veterans and pensioners, and wages would be adjusted for favored groups in anticipation of higher prices.
  • A further innovation we had missed was the expectation that free distribution of drugs and certain medical procedures—when actually available—would end; households would start to pick up some of the costs of their medical care.
  • As in previous reforms, a fundamental problem was how to handle wages given the expectation that commodity prices would rise. The solution, as in the past, was to raise them, but in the absence of any clear market signals about what wage levels would be sustainable; as we will see tomorrow, this became an Achilles heel of the whole effort.

The Rural Sector

Park claims that there was consideration of a range of options for the agricultural sector, from simply delegating responsibility to the cooperatives as a whole without changing their structure; reducing the size of work teams to improve incentives; or following the Chinese path of decentralizing decision-making down to the household. As we and others have noted, the middle path had confusing elements; Randy Ireson was particularly cogent on this point. On the one hand, the reduction in the size of work teams was undeniably progressive, as was a fixed division between state and cooperative (70:30), at least if credible. But what was not resolved, as we will see, was how the farmers' 30% was to be divided and what role the cooperative administration would take.

A final feature of the reforms that Park highlights—and fits with the demands of the succession—was increased surveillance. The regime was clearly concerned that the reforms not get out of hand, and placed particular emphasis on border areas vulnerable to an influx of IT products in particular.

Tomorrow, things fall apart.