The Democratic People’s Republic of Korea (DPRK) has been described as the “last bastion of Soviet-style communism” and the home of “possible [sic] the only truly Communist regime left in the world”. But ample evidence shows that the economy of the DPRK has undergone significant changes over the last 25 years and that the private marketplace is playing an increasingly important role in the economic life of the country.
An Arduous March follows the Cold War
The end of the Cold War proved to be disastrous for the DPRK economy. The Soviet Union and the People’s Republic of China (PRC) rolled back the significant trade subsidies they had offered to the DPRK as a fellow member of the communist bloc. Between 1990 and 1994 trade between the DPRK and the Soviet Union fell from $2.56 to $0.14 billion, the flow of subsidised oil and machine parts from both the Soviet Union and the PRC dried up, and the output of the poorly-designed and energy-intensive state-owned and collective farms fell sharply (Lankov, 2013). The economy slowed and the country’s trade deficit grew sharply. Both Moscow and Beijing started asking Pyongyang to pay upfront for its desperately needed energy imports (Demick, 2012).
The country’s Public Distribution System had been providing food rations to all households since the 1950s. The DPRK is a highly urbanised society, with about 70% of the population living in urban areas (Reed, 2005). The result was that its citizens were heavily reliant on rations provided by the state through the Public Distribution System (Noland, Robinson, & Wang, 2001). The size of the food rations provided by the Public Distribution System started to shrink in line with the slowing of the economy from the 1970s onwards (Lankov, 2013). But the decline accelerated with the fall in the output of the state-owned and collective farms following the sharp fall in energy and machinery supplies from the Soviet Union and the PRC. By the mid-1990s, the Public Distribution System had collapsed and a major famine, known as the Arduous March, spread across the county. It was from these events – the collapse in the ability of the state to provide for the essential needs of its citizens and the famine that followed – that would drive the marketisation of the DPRK economy.
The market provides where the state fails
Former DPRK President Kim Il Sung acknowledged the existence of the private markets as far back as 1969, when the economy of the DPRK was still outperforming that of the Republic of Korea (ROK) (Martin, 2004). He was of the view that small-scale market behaviour made a positive contribution to the life of country through the provision of items not provided by the state, and that its eradication would lead to black marketeering (Kim, 1992). This is what happened increasingly during the Arduous March, when the Public Distribution System failed and the economy shifted from a command-style socialist economy into a model of market socialism in which private markets supplemented the command economy (Reed, 2005).
During the Arduous March, private markets appeared in which farmers sold produce grown in private plots and non-farming households traded craft manufactures and household services. An example could be found in the city of Hoeryong in the far north of the country: by the end of the 1990s this city of around 20,000 people had developed a market attended by 1,000 to 2,000 merchants seeing foodstuffs and other household goods. The marketisation of the economy wasn’t a welcome development in the eyes of the government, and in 2009 Pyongyang tried to stifle market activity through a currency exchange (Lankov, 2013). Households were forced to swap the cash (the old won) they held for a limited amount of new won, a move which aimed to strip wealth out of the private economy. At the same time, the government massively increased the wages of state employees. The result was massive inflation, which Pyongyang attempted to address by closing the private markets. This in turn impacted even formerly comfortable members of the Pyongyang elite, who were used to the market being their main provider of goods. The backlash led the central government to reopen private markets – a prudent move given that by the mid-2000s the informal economy was providing 78% of household income (Kim & Song, 2008). It also arguably contributed to the country’s “yuanization”: the use of PRC currency in the private market rather than the less reliable and inflation-prone DPRK won. These two shifts – the need for the state to allow the development of the private market activity, and the use of foreign currency for internal trading – shows that power of the marketisation movement and its ability to move the levers of economic control further out of the reach of the country’s economic bureaucrats.
After Kim Jong Un took over the country’s leadership following the death of his father Kim Jong Il in 2011, the state appears to take further steps to open the economy to marketisation, especially with regards to agriculture. The so-called June 28th Measures introduced in 2012 saw the division of state-owned and collective farms into “production teams” of 5-6 people – roughly the size of a family. The state would take 70% of the agricultural goods produced, leaving the production team with remaining 30% to consume or trade in the private market. This is a move similar to that taken in the PRC with the introduction of the Household Responsibility System, which signalled the beginning of the end of collectivisation (Li, 1998) and the start of experiments in economic liberalisation under the leadership of Deng Xiaoping. The results of Pyongyang’s efforts have been modest but sustained for several years, with recent reports indicating that the country’s food production has reached its highest level since the mid-1990s.
The growth in international marketisation
In addition to the marketization of the economy within the DPRK, the country has started seeking out new opportunities to engage in international trade. The PRC has long been the most significant supporter of and trading partner to the DPRK. The supportive approach of the PRC has been demonstrated by large-scale infrastructure projects designed to make the border areas more accessible via new bridges, roads, and railways, and the movement of several thousand DPRK citizens who work across the border in Dandong (Reilly, 2014), where they can earn valued foreign currency. A side effect of this economic activity is that the economic literacy of DPRK businesspeople has reportedly improved through their engagement with the private market through trade with Chinese businesses, to the point that some Chinese businesses have been encouraged to relocate across the border into the DPRK (Reilly, 2014). This type of activity shows how far the marketisation of the DPRK economy has progressed, and how exposure to cross-border markets has changed the economic activity experienced by DPRK citizens.
The country has also made attempts at emulating the Special Economic Zones (SEZ) that formed the hubs of foreign investment growth in the PRC during the 1980s and 1990s. An SEZ provides foreign investors with opportunity to develop businesses in selected areas in which they received preferential tax arrangements and infrastructure. The Kaesong SEZ is arguably the most well known SEZ in the DPRK. Located on the border with the ROK, it contains more than 100 businesses from the ROK and employs more than 50,000 DPRK citizens. The Kaesong SEZ was closed briefly in 2013 by the DPRK, but it soon reopened as it was a good source of the foreign currency the DPRK needs to buy energy imports and other industrial inputs the country has been lacking since the end of ‘friendship rate’ imports offered by the Soviet Union and the PRC in the early 1990s. It also provides opportunities for the citizens of the two countries to have some limited contact, which they have generally been unable to enjoy since the Korean War armistice went into effect in 1953. As of January 2016 the Kaesong SEZ has been shuttered by the ROK following another round of nuclear and missile tests by the DPRK. It is not clear if the Kaesong SEZ will reopen, or what impact the closure may have on both the DPRK economy and the strained relationship between the two countries.
Marketisation with Juche characteristics?
The economic situation in the DPRK is not as simple as it might appear at a glance. The economic shock that followed the end of industrial inputs as ‘friendship rates’ from the Soviet Union and the PRC drove the country into a famine that seriously impacted the level of control that the central government could exercise over the country’s economy: when the state was no longer able to provide for the basic needs of its citizens, private markets flourished. Despite attempts to lessen the strength of the private markets through policies such as the failed currency exchange, marketisation has prevailed and the state has withdrawn further from the daily economic life of many of its citizens, as demonstrated by the fact that four-fifths of household income comes from the private market.
It is also apparent that individuals, rather than just the state, are now engaged with cross-border trade with businesses in the PRC. Engaging in trade with the PRC has led to an increase in the economic literacy of businesspeople in the DPRK, which has in turn led to further economic development through cross-border private market activities.
It may be true that the DPRK can appear at the surface to be a Soviet-style relic of the Cold War and a stalwart remnant of communist economics, the evidence about the economic life of the country clearly shows that marketisation plays a major role in the country’s economy.
Demick, B. (2012). Nothing to Envy: Love, life, and death in North Korea. Sydney, Australia: Harper Collins Publishers.
Kim, B.-Y., & Song, D. (2008). The participation of North Korean households in the informal economy: size, determinants, and effect. Seoul Journal of Economics, 21, 361–385.
Kim, IS. (1992). Kim Il Sung on the Management of the Socialist Economy. Pyongyang, DPRK: Foreign Languages Publishing House.
Lankov, A. (2013). The Real North Korea: Life and politics in the failed Stalinist utopia. New York, United States: Oxford University Press.
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Reilly, J. (2014). China’s Market Influence in North Korea. Asian Survey, 54(5), 894–917. doi:10.1525/as.2014.54.5.894