Reform With Korean Characteristics

From the February edition of Korea Business News (KBN). To receive KBN monthly, sign up here. It's free!

This summer and autumn harvest season will be a crucial time in determining the effectiveness and success of recent agricultural and financial reforms in the DPRK, and for gauging whether or not the country will continue in a direction of substantial economic development.

The latest major reform attempts started with the “June 28 Measures” of 2012 - part of the DPRK's "economic management in our own style." The policy changes stated, among other things, that Korean farmers would be allowed to form their own work teams in much smaller numbers than before. And, the teams’ share of output would rise to 30 percent, whereas before everything was collected by the state in exchange for ration certificates. However, the measures came too late in the season to have any widespread effect. 2013 was different - the DPRK saw its best harvest season in decades.

The wider results of the policy changes were mixed, but in an apparent attempt to build on the successes and fine tune the reforms, another set of policy changes came in the summer of 2014. Now referred to as the “May 30 Measures,” they went a few steps further. Specifically, the production teams will become even smaller - about 4 to 6 people. The implication being that single households would become their own “production teams” with their own plots of land rather than belonging to a large farming collective of a hundred or more households and being moved around to other locations by the state as needed. The idea is that the new, smaller teams will be leased the land for a yet unspecified number of consecutive years, encouraging better land maintenance and more ease of coordination within teams. Additionally, the teams will now come away with 60 percent of their harvests - double the amount of the previous year and a radical shift of direction.

Indeed, “revolutionary” in the words of Andrei Lankov, who wrote in Al Jazeera in November,

“The measures did not stop there, though. This time the North Korean leadership has set its sights on reforming the moribund and hollowed out state industrial sector. According to the reforms, directors of state factories will find themselves covered by a new "director responsibility system". This system makes a director, hitherto a state-appointed and carefully supervised representative of the party and state, into the approximate equivalent of a private businessman (factory managers in North Korea are almost always men). Under the new system, factory directors will have the freedom to decide how, when and where they purchase technologies, raw materials and spare parts necessary for their enterprises. They will also be allowed to decide who to sell to. They are also given the right to hire and fire workers, as well as to decide how much to pay for a particular job.

"Under the new system, there is a tacit assumption that directors will be able to reward themselves generously for their own work - a feature that makes them virtually indistinguishable from private entrepreneurs in market economies.”

These reforms are bound to be (and have been) likened to the Chinese agricultural reforms beginning in the late 1970s, and the term “director responsibility system” in North Korea’s "May 30 Measures" is particularly interesting in this regard.

In 1978, a small group of destitute farmers facing starvation in China’s Anhui Province made a secret agreement to split the land of their farming commune among individual households which linked their earnings to their effort and made them responsible for their taxes and sales - almost exactly what the "June 28 Measures" and "May 30 Measures" aim for in the DPRK agriculture sector. Local Communist Party cadres agreed to the arrangement with the understanding that if they got in trouble, the farmers would take care of the cadre's families.

The arrangement was illegal at the time, but the risk payed off incalculably. The practice spread as word of its success did, and two years later the government legalized the practice as the “household responsibility system,” with 5 percent of farmers in China practicing it by 1980. By 1982 it was 67 percent. By 1983, 98 percent. By 1984 the people’s commune system was abandoned nationwide for the household responsibility system.

Output from rural enterprises grew at 25% per year, compared to an average of 5.5% for state-owned enterprises. This new rural system produced a range of simple consumer goods, including processed foods, and services such as distribution, restaurants and shops. But, in China these developments came about in a time of much wider economic and social reforms including the relaxation of mobility - something that doesn’t seem to be in the works yet in the DPRK (though it could conceivably be done more easily in North Korea given that the entire population is about the same as Beijing plus some surrounding towns).

That’s the plan and the potential of the reforms. The devil, as ever, is in the details, and the rollout of the reforms has revealed some difficulties. As Park Hyeong-jung of the Korean Institute for National Unification detailed in Korea Focus,

“When briefings began in early July [2012] for party administrative officials, new worries spread over possible inflation and other difficulties. They apparently recalled the failed economic measures of July 1, 2002 and the currency reform debacle in 2009. North Korean authorities stressed that the New Economic Management System was not a step toward a general economic opening. Nevertheless, the price of rice jumped and demand for Chinese currency rose in the black market. On July 6, in Hamhung city, the price of Chinese rice shot up from 3,600 won to 6,000 won per kilogram and back alley markets in major cities were paralyzed.”

Along with the market’s anticipatory response, local officials responded in different ways with some reportedly not implementing the new practices fully or correctly. The reasons ranged from inadequate training to a desire to protect the status quo of guaranteed interests in the established system. The credibility gap in turn distorted many farmers’ responses to the intended incentives, leading to lackluster results.

Park continues, “Each province was to operate 'direct supply centers' where enterprises would freely purchase raw materials and other necessities. This was to ensure North Korean authorities have at least limited control over production activities. Even coal and electric power should be procured directly with cash or checks. Food also will be sold freely at the supply centers.”

This plan implied a certain surplus - or reserve resources like fertilizer, tractors and a steady electricity supply - which turned out to be short of what was needed for the transition period.

A good indicator that the state was working to solve that problem would be a greater focus on bringing in direct foreign investment, and on that front some 20 special economic zones have been established in the last two years. But again, the outlook is not too clear as of yet.

Another potential positive sign is that the "May 30 Measures" also include financial reforms aimed at promoting savings and credit card use in the general population. In a 3 February interview with Choson Sinbo, the president of the Central Bank of the DPRK Kim Chon Gyun stated, “The country is trying to better circulate domestically hoarded money to meet the demand for cash in the country’s developing economy.” He continued, “with the establishment of our-style economic management methods, there are plans of improving the methods of financial and economic institutions and installing measures in accordance with the emergence of entrepreneurial activities.”

With international sanctions steering most foreign investment away, the DPRK will have to focus hard on sparking internal investment where it can. And as Stephen Haggard of the Petersen Institute of International Economics argues, it’s time for a serious re-think on those sanctions.

Here at KBC, our attitude remains one of cautious (and patient) optimism. We take time again to ask, “what are we waiting for and why?”

Looking much further ahead to a situation where agricultural production has taken off and foreign investment makes its way to SEZs and beyond, eventually, greater mobility for Koreans will need to follow when urbanization becomes necessary due to technological advancement in agriculture – just as China (and many other countries) did and continues to do with its hukou system. Considering the DPRK’s comparative disadvantage in agriculture, it will probably happen quickly.

One of the effects mass urbanization had in China was increased remittances of migrant workers back to the rural areas they came from. This led to greater local investment in fertilizer, pesticides and better farming equipment. Not to mention the opening of restaurants and shops and the increase in sales of processed foods – and someone had to produce and supply all of that.

That higher efficiency led to higher output, and that surplus freed up time for more people. More families were able to send their kids to school. More people were able to focus on developing talents, broadening horizons and realizing their potential. And that, friends, is the whole point.

Take it from Kim Jong Un himself who said in a recent speech on agriculture: “By operating the system efficiently as required by the developing reality, the agricultural sector should bring the sense of responsibility and creative zeal of farmers into full play. It should give farmers clear-cut tasks related with soil management, farming operations and production plan and review their results in time and in a substantial way, thus encouraging them all to work in a responsible manner with consciousness and high enthusiasm as befitting masters.”