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

January 9, 2014 10:15 AM

Yesterday, we outlined the debate and overall direction of Kim Jong Un's "new management system," as described in an important overview by Park Hyeong-jung (Korean Institute for National Unification) in the most recent issue of Korea Focus. Today we talk about the unraveling.

One of the problems with introducing reform in state socialist systems with some scope for markets is that the markets respond to the anticipated policy changes. When reforms were introduced in both 1998 and in the botched currency reform of 2009, the government almost immediately confronted sharply rising prices, to some extent of their own making (by pushing up wages) but to some extent anticipatory as economic agents looked down the game tree of loosened controls. Perhaps the central contribution of the Park analysis is to focus in on how these price increases helped to derail the reform effort. Almost immediately on briefings of the new system, both rice prices and the Chinese yuan prices rose, implying a depreciation of the won. Park claims that these issues were aired in Cabinet meetings around the time of the celebration of Kim Jong Un's first year in office. In contrast to China, where provincial officials pushed for more reform, North Korean provincial officials wanted to delay reforms until after the harvest to dampen speculation.

Nonetheless, pilot reforms were rolled out in select enterprises and cooperatives, but with adverse effects. Shortages of food and rising prices meant that enterprises could not pay adequate wages, and of course the agricultural reforms could not be expected to yield short-term payoffs given that planting decisions had already been made for the crop cycle.

But the problems were more profound. As we and others have noted, the problems with the cooperatives are not only with incentives, but with their political organization. Park's outline of the political economy problem is worth quoting at length: 

"A collective farm has about 100 households with 200 farmhands. Additionally, each collective farm requires 40 to 50 people who include the secretary of the basic party unit, and cadre members of the Socialist Youth Workers' League, the Farm Workers' Union and the Women's League. Many of these overhead personnel will have to leave when collective farms are divided into family sub-units. Thus, there will be less state control over farmers. If officers of collective farms are elected directly by farmers, they may always act in favor of farmers and residents may long for the election system in capitalist societies. It was also feared that farmers could misreport their harvest in order to have more to sell in the open market."

Morever—again as many outsiders noted—the "reforms" were coupled with an effort to shut down private plots and move production back into the cooperative framework. This was precisely the wrong direction to go, but completely understandable from the perspective of cooperative managers.

In sum, the problem with reform centered more broadly on the fundamental political as well as economic weaknesses of the North Korean system: namely, that it is dominated by social forces—the party, the military, the security apparatus—which are fundamentally unproductive and live off of the efforts of those who are. One of the particularly disingenuous arguments raised by the cooperative cadre was that productivity would fall if farmers did not enjoy the corvee labor of students sent down to the countryside. The combination of pressures within the cooperatives and rising prices led almost immediately to a reversal of the 70:30 commitment, undermining the credibility of the reforms from the outset. Why invest effort if it will just be taxed away?

Somewhat different problems emerged with the enterprise reforms. Those sectors where there was effective demand for surplus output—such as cement—boomed and wages rose sharply. But these wage increases only fed inflation of basic commodities, and of course did nothing for sectors in which longer-term prospects were unfavorable; in any such reform, value-destroying capital has to be shut down or redeployed at some point. Moreover, the project faced fundamental supply constraints: even if factories could generate profits, they needed inputs and the social infrastructure—power, raw materials, intermediates, transport—remained in disarray as investment was poured into elite ventures in Pyongyang, white elephants and the military albatross hanging around the North Korean's economy's neck.

Park reaches exactly the right conclusion about the reforms: that while they failed, all is not lost. He claims that they demonstrated that there are in fact groups within the state that are thinking seriously about reform, and that even if this attempt was abandoned—as he claims it was—it could be picked up again.