Don't Believe North Korea's Economic Reforms
By Nicholas Eberstadt
Posted: Thursday, April 8, 2004
ARTICLES
Asian Wall Street Journal
Publication Date: April 8, 2004
Anyone who has spent much time following North Korean affairs will be familiar with a hardy perennial in the trade: The
prediction that Pyongyang would soon be embracing economic reform. Scholars and analysts have been detecting quiet
signs of reform and opening in the North Korean economic system since at least the 1980s. The intensity of those
premonitions typically waxed and waned according to the current temperatures of Pyongyang's relations with Washington
and/or Seoul--and the failure of those predications to actualize, of course, never dissuaded proponents from reintroducing
the notion for consideration.
For decades, looking for signs of incipient North Korean economic reform seemed to be a pastime akin to waiting for
Godot. Then suddenly--at least according to some--Godot arrived. In July 2002, Pyongyang enacted a package of
macroeconomic policy changes that marked a notable departure from North Korea practices over the previous generation.
Moreover, North Korean leadership now sometimes openly describes these measures as "economic reform"--a term North
Korea had vigorously rejected before, on the understanding that no reforms were needed.
The 2002 package introduced radical increases in the price of basic goods and services such as food, fuel, electricity,
transportation, rent and wages, steep but not quite so radical wage hikes, the devaluation of the North Korean won to
about 150 to the dollar from a previous exchange rate of 2.15, and the formal dissolution of a ration system that had, at
least in theory, previously provided for most basic household goods.
Scholars, analysts and policy makers from the U.S., Japan and especially South Korea have since offered cautiously
optimistic--and incautiously optimistic--assessments of the significance of these changes. Some argue that North Korea is
now at last moving toward a pragmatic economic policy, and maybe even toward a market-oriented socialism of the sort
that has transformed and energized the economies of Vietnam and China.
There are many reasons that observers might wish to see economic reform in the DPRK: advocates of the "sunshine"
policy could claim vindication for their strategy; international-security types could start thinking about genuine tension
reductions on the Korean peninsula; humanitarians could envision a mitigation of North Korea's desperate poverty. But in
the final analysis we must be prepared to see what actually exists in North Korea--not what we would prefer to find. And by
the criterion of facts on the ground, unfortunately, optimistic inklings about reform cannot sustain serious scrutiny. The
weight of evidence today does not support the proposition that North Korea has entered into a process of serious
economic reform--as it likewise did not 20 years ago, when I first began hearing such wishful thinking as a then young
student of North Korean affairs.
It may be cheering, of course, to see anything self-described as "reform" emanating from the organs of power in North
Korea. And by comparison to Pyongyang's economic policy adjustments since, say, the late 1960s, these measures may
be indeed described as bold, experimental steps. Yet in a sense this only attests to how impoverished our expectations for
North Korean policy have become over the decades. Viewed for what they are--rather than for what we might hope they
will prefigure--the 2002 package of economic changes can best be described as rather modest: either by comparison to
"economic reforms" undertaken in other troubled economies or by comparison to the job that needs doing in North Korea.
In practical terms, the 2002 package accomplished one important function: it re-monetized a limited portion of North
Korea's domestic economy. By the late 1980s, North Korea was already a shockingly demonetized operation: back of the
envelope calculations for the year 1987 suggest that the wage bill in that year would have amounted to at most a third of
North Korea's official net material product-and still less in relation to the country's GDP. Yet over the following decade and
a half, the role of the national currency in domestic economic activity was progressively diminished. By the turn of the
century, North Korea was perhaps the modern world's most completely demonetized economy--excepting only Khmer
Rouge Cambodia, where for a time, by decree, money was abolished altogether.
The re-emergence of money in North Korean economic life--and with it, the re-emergence of a limited measure of open
market activity--marks an incontestable and important improvement for the country's tiny consumer sector. But it is
important also to recognize just what this July 2002 package does not signify.
It does not, to begin, represent an unambiguous move toward market principles in the North Korean economy. To the
contrary, re-monetization of the domestic economy is an essential condition for the resurrection of North Korea's badly
broken central-planning mechanism--which has not managed to launch another multiyear national plan since the last one
was ignominiously concluded in 1993. For the past decade, North Korea has stumbled haplessly along as a "planned
economy without planning," in economist Kimura Mitsuhiko's apt phrase. Re-establishing socialist planning requires
graduation from the primitive barter practices that have characterized the North Korean economy in recent years.
Limited re-monetization of the domestic economy does not signify any transformation of North Korea's badly distorted
production structure. To the contrary, the manifestly limited supply-response of the country's economy to the 2002
measures is indicated on the one hand by the subsequent steep drop in the black-market exchange rate for the North
Korean won, and on the other by Pyongyang's hurried introduction, barely 10 months later, of new "people's life bonds"-worthless, utterly illiquid and involuntarily assigned in lieu of wages to workers or as payment to enterprises.
To be sure, the limited reintroduction of money in North Korea's domestic economy may elicit some supply response: a
Leibenstein-style increase in "x-efficiency," or improvements in output without any corresponding improvement in
technology, investment or resource allocation. The advent, or more properly, the return, of domestic currency to North
Korea's consumer sector has facilitated the recent emergence of some "farmers' markets" and even some larger, more
general, "markets," both within Pyongyang and outside the capital.
But without the possibility of a reallocation of state resources in accordance with new demand conditions--and that
possibility currently does not exist in North Korea--the supply response must be tepid and superficial. So long as goods
sold in these much-discussed "markets" come from isolated households, rather than official enterprises--and must be
transported individually, by bicycle, on back or foot, rather than en masse by official rail or motorized freight--it's unrealistic
to expect an upsurge in production.
Thus, it should come as no surprise that the World Food Program recently warned prospective donors that North Korea
faces an imminent return to mass hunger barring an influx of new food aid into the relief pipeline--heartening signs of
newly sprouted "people's markets" notwithstanding. The contrast is not a contradiction, but rather a faithful--if painful-reflection of the scope and limits of the 2002 reforms.
Those reforms do not in themselves stave off the specter of North Korean economic collapse. Nor do they have any
obvious or direct bearing on the prospects for a shift to China- or Vietnam-style export-led growth. One need only contrast
North Korea's patterns of trade performance over the past generation with those of China and Vietnam to appreciate this.
Vietnam began its push for an export-orientated economy when its Soviet subsidies abruptly ended--whereas North
Korea's reaction to the withdrawal of those subsidies was a marked worsening in its export performance and an increase
in aid dependence.
Though still predominantly agrarian societies, Vietnam and China both manage to export far more merchandise on a per
capita basis today than does the ostensibly industrialized North Korea because they have embraced the linkages and
supply-response mechanisms that Pyongyang has assiduously prevented from taking root.
North Korea has not even begun to tinker with the macro policies, or promote the micro institutions, that would permit a
China- or Vietnam-style export response. Thus for the time being, sustained economic revival based on pragmatic
economic reform and exports is simply not on the cards for North Korea.
For better or ill, Pyongyang watchers--and more importantly, North Korea's abused and long-suffering subjects--are still
waiting for Godot.
Nicholas Eberstadt holds the Henry Wendt Chair in political economy at the American Enterprise Institute.
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