An economy going nowhere
According to the Bank of Korea, North Korea’s economy grew 0.8 percent and 1.3 percent in 2011 and 2012 respectively. Although that is a snail’s pace, the impoverished economy is muddling along. But muddling along is not recovering and it certainly isn’t booming. If the country opened up its farming sector and allowed market activity, growth could pick up to more than 5 percent in a very short period of time. Then it would at least not have to worry about feeding its people.
Economies work on mechanisms and rules. There are no shortcuts or magic tricks. Without ownership, trade and free corporate activities, an economy simply won’t grow. North Korea has been sustained all these years through illicit trade from overseas without making the basic changes it needs to make at home. Adam Smith in the 18th century discovered that a nation’s wealth hinges on the stream of goods and services it creates, not how much gold or silver it sits on. To become rich, North Korea must produce goods that it can sell abroad. The problem is that instead of bolstering manufacturing activities and capacity at home, the country relies entirely on bringing in money from overseas. Anyone who can bring in foreign money from abroad is allowed to keep some. Companies or institutions that trade with China get 5 percent of the revenue for private spending, including bribes to pay Chinese officials. Thanks to those incentives, foreign money trickles into the country, but does nothing to spur industrial activity. Because manufacturing is still heavily controlled by the state, new capital does not translate into investment to accelerate industrial activity.
Liberalization in markets and trade can spell both a windfall and doom for the Pyongyang regime. North Korea is no longer a hermit kingdom in terms of trade. The country has opened about 30 percent to 60 percent on the external front. Overseas trade created market activity. People who have earned money overseas consume in the market, which primarily sells Chinese merchandise. The traders and consumers are mostly smugglers and loan sharks. They report to people in high places and are protected in return.
Government officials and politicians have tasted the sweet smell of money. Before there was little to buy in North Korea. But money can now buy or rent comfortable apartments in Pyongyang and imported products. Riches have triggered internal struggles among powerful institutions and figures. Money was partly behind the purge and execution of Jang Song-thaek, the No. 2 figure in the regime and uncle of North Korea leader Kim Jong-un.
High-rises in Pyongyang symbolize North Korea’s weakness rather than its economic progress. A skyscraper there is built on a level of wealth inequality that is worse than any Latin American country. There is an abnormal concentration of capital in construction because money has nowhere else to go. A building goes up through a mysterious deal between a loan shark and state institution, under which a part of it is donated to the institution and the rest rented out. Even construction of a power station is not financed by the government. It is instead assigned to an institution and somehow the enterprise must finish it within a given time with whatever means it can find. Construction cannot get anywhere through honest or normal procedures.
Worse, the people in Pyongyang do not know how to steer an economy. They are naive to believe that if they build a ski resort and declare it a special foreign zone they could draw capital from overseas. What is imperative is to funnel money within the country into industrial sites by promoting investment and start-ups. Companies must be allowed ownership. Foreign investment will come afterward.
Without reforms from within, North Korea cannot make any headway with its economy simply from declaring itself more open. An opening that allows North Koreans access to foreign products and lifestyles can instead threaten the Pyongyang regime. But Pyongyang cannot close its doors because that would translate into a collapse of its feeble economy.
The North Korean regime sits at a crossroad. It must be aware that the economy cannot be sustained long in current conditions. Trade and market activities have helped improve the facade of North Korea, but are nibbling away at the country’s ideological foundation. Its rigorously protected regime could one day come crashing down as we have witnessed in the collapse of a 23-story residential building in Pyongyang.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, June 11, Page 29
*The author is an economics professor at Seoul National University.
By Kim Byung-yeon