It’s the economy, stupid

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It’s the economy, stupid

Kim Byung-yeon 
The author is an economics professor at Seoul National University. 
 
Money was the problem in socialism, too. When Lenin rose to power after the Bolshevik Revolution, he declared an end to the use of money in the Soviet economy based on Marx’s critique of capitalism. But it took Lenin only a few years to rescind that bold idea as labor productivity and industrial output plummeted, triggering revolts.  
 
The currency system was eventually reinstated, and the people in the Soviet Union were allowed to purchase goods with their wages again.  
Even in the Soviet system, many problems arose. People held most of their savings in cash and avoided bank deposits because interest rates were nil and withdrawal was difficult. As a result, the Soviet government could not extract money from banks to use on its state-run companies. To address this dilemma, the government gave lottery tickets to bank depositors, undercutting a core socialist value that denounced unearned income. Even so, by the early 1980s, only 40 percent of all financial assets of Soviet households were saved in banks.
 
The Soviet government’s forced sale of bonds to its people to fund state projects and gather cash from citizens also contradicts socialist values. After it had trouble selling national bonds to the people, the government nearly forced them to buy them. Even worse, the bond certificates were produced with such shoddy printing skills that the letters faded even before withdrawals were made. Some people even used the certificates as wallpaper. In 1982, the Soviets sold national bonds with a 20-year maturity and gave two winners of a lottery a Volga sedan and a Zhiguli car as prizes each.  
 
Last month, online news outlet Daily NK reported that North Korea had begun issuing government bonds. The report has yet to be confirmed, but the case seems to be highly probable considering the North’s current economic situation. According to the report, the government handed over 60 percent of the bonds to state institutions and companies so that they can pay their suppliers of materials with the bonds instead of cash; 40 percent of the bonds were sold to individuals and the new entrepreneurial class, also known as donju, in exchange for their foreign currency.
 
In 2003, North Korea issued government bonds with interest rate for the first time since the 1950-53 Korean War after mimicking the Soviet Union, and promised to redeem them in installments over the next five to 10 years. However, given the inexorably high interest rate during the period, the regime practically robbed its people of their cash.  
 
The issuance of government bonds by North Korea suggests a limitation of its self-reliance policy. It is proof that its supply chain has been immensely damaged by international sanctions and the coronavirus pandemic. Socialist companies normally work by a central plan devised by the state to meet their production goals and pass the baton on to the next company in the supply chain.  
 
However, as the North Korean government is unable to obtain resources for its production lines, many companies have reduced their work hours or shut down. Before the sanctions were imposed, the government was able to secure resources of production through companies engaged in foreign trade, in part by placing special orders with them or selling end products in the market. But at a time when both trade and the market have withered to a bare minimum, even this tactic cannot do the trick.  
 
The Daily NK’s report on how the North Korean regime is trying to sell bonds to the affluent donju class in return for foreign cash shows the extent of the country’s shrinking foreign currency reserves. But if the regime fails to sufficiently compensate the donju class for their bond purchases, they will not buy the bonds and the authorities could respond with more forceful measures, which will only add political baggage to the regime — or worse — ignite a conflict between the two sides.  
 
The last time North Korean leader Kim Jong-un appeared in public, he vowed to bolster the North’s nuclear war deterrence. But he must learn from the Soviets’ failures. The Soviet Union did not collapse because of the absence of nuclear deterrence. Instead, economic problems were a core part of its downfall.  
 
North Korea’s Achilles’ heel is also its economy. If the regime thinks it can cover the flaws of a socialist economy by issuing government bonds, think again. Without a lucid understanding of why socialism fails, a brighter future will never be in store for the country across the border.  
 
Translation by the Korea JoongAng Daily staff.  
 
JoongAng Ilbo, May 27, Page 35 

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