The Road Ahead for the North Korean Economy After the Party Congress

(Source: Rodong Sinmun)

North Korea’s Eighth Party Congress and the follow-up meeting of the Supreme People’s Assembly (SPA) are now over. As the dust settles and instant commentary recedes, the question remains: Given the harsh economic realities facing the country today and for the coming year, what is the meaning of these events for both North Korea and the international community? Both the speeches and the budget plan that were presented reflect recognition of the country’s dire economic conditions and the leadership’s aspirations for economic development in the next five years. The regime and policymakers in the international community will face both challenges and opportunities in the coming months. The challenges include navigating the economy and society into a post-pandemic period that can lead to a resumption of economic stability and public safety and adapting to a changing external environment. There are also opportunities for strategic shifts of policy, diplomacy and external political and economic relations that could lead to a more secure and prosperous future for North Korea and the region despite the posturing at the Party Congress.

Macroeconomic Perspective

As Ruediger Frank highlighted in his recent article on the SPA meeting, the budget approved for 2021 of 0.9 percent growth for both planned revenue and expenditure is the lowest in decades and a sharp decline from the 4.2 percent adopted for 2020. These decisions reflect a realistic acknowledgment of the economic impact of sanctions, COVID-19 protection measures, natural disasters and failures of economic management, as well as expectations of continued hardships this year. However, the five-year economic plan presented at the Party Congress provides no explicit path for transitioning from management of the pandemic to restoring orderly economic activity. Rather, it spells out aspirational goals to build on the unfinished foundation of the economic strategy adopted in 2016.[1]

If North Korea remains isolated, the plan appears unachievable despite the call for self-reliance through import substitution and more effective management of the domestic economy. To meet the plan’s goals would require substantial foreign trade, access to technology transfers and mobilization of capital to support expansive investment plans. Achieving the external economic relations needed to complement domestic efforts to improve productivity and growth would require either ramped-up evasion of sanctions, large-scale trade and economic assistance from China, or a diplomatic breakthrough permitting a very different path of economic engagement with South Korea and the global community. While these are possible in the next few years, the alternative—and more likely—scenario would be a growing risk of continued deterioration of the economy and social conditions and shortcomings in implementing the plan.

North Korea is also compromised in its capacity to exercise effective macroeconomic management by its underdeveloped financial, legal and regulatory systems. Another problem is the relationship of the state to what has become a mixed economy featuring the growth of formal and informal markets, privately managed enterprises and privately mobilized and invested savings outside the banking system.

The growth of private initiative and rewards has been tolerated over the past 20 years but has not been embraced in official party rhetoric, which has inhibited the formulation of policies and institutional capacity to efficiently manage a mixed economy or planned transition, as has been the case in both China and Vietnam.[2] Moreover, while privatization is progressing in North Korea, private ownership of assets is still technically illegal (although increasingly accepted in practice). Nonetheless, enterprise and decentralization reform efforts supported by the party have been encouraged by a leadership that is well aware of Vietnam’s success in achieving economic development while retaining the dominance of the party.

Critical Role of Reform of Enterprise Management

The economic reforms adopted in 2002 first introduced changes in enterprise management after the economic crisis of the 1990s. The most important of these gave managers more discretion in hiring and firing employees and eliminating the party representatives in the management teams. These reforms faltered a few years later for internal and external reasons. Renewed attention to improving enterprise management emerged late in the Kim Jong Il period and was embraced by Kim Jong Un when he assumed power.

The articulation of a new socialist enterprise management strategy began in 2013 and led to amendments to the Enterprise Act in 2014 that granted managers rights to plan and manage for profit, “engage in foreign trade and joint ventures and accept investment from domestic private investors.” The increased autonomy given to state enterprise managers extended to local-level enterprises and represented a significant decentralization of decision making.

Private entrepreneurship expanded beyond markets for consumer goods, accomplished largely through informal licenses to operate under the legal framework of existing state-owned enterprises or government institutions such as ministries. Under this system, the state-owned sponsors received agreed payments for their permission to operate under their umbrella, providing a semblance of security that enabled the entrepreneurs to invest their own monies and grow their businesses.

The boundaries between state-owned enterprises and private entrepreneurs have since become increasingly blurred through practices such as subcontracting and rentals of state-owned facilities or land. For state trading companies, a “kiji” system was established to permit privately managed foreign exchange earning activities.

This relatively unregulated system of commercial activity helped offset the impact of external sanctions by stimulating innovation, more efficient use of resources and productivity growth in the domestic economy and unsanctioned commercial trade. It also contributed to the emergence of a wealthier middle class of successful entrepreneurs (donju), and growing disparity between wages in the state-linked institutions (e.g., military and state security organs) and those linked to the growing marketization of the economy.

These changes in political economy, differences in the mindsets of traditional socialist economy policymakers and managers, and both state and private enterprise managers underpin Kim Jong Un’s criticisms of state economic management performance and his call for changes in the economic management system implemented by the Cabinet.

The core concepts of a new and responsible socialist enterprise management system evolved through debates in North Korean economic journals and policy circles over several years and were formalized in amendments to the constitution in April 2016, just prior to the Seventh Party Congress. Language referring to the traditional Taean Work System was eventually replaced by references to the “Responsible Management System for Socialist Corporations” (RMSSC). This change increased the autonomy of managers, introduced market elements and provided the legal underpinning for further efforts to reform the system. Article 33 of the revised constitution mandates that “the state shall execute the Responsible Management System for Socialist Corporations in economic management while ensuring the correct use of economic spaces such as production costs, prices, and profitability.”

However, progress in implementing the five-year strategy adopted in 2016 was adversely affected by the heavy sanctions imposed in 2017, which had a deep impact on trade and availability of imported inputs critical for both agricultural and industrial production. With economic management reforms stalled by the need for defensive economic planning in the face of these developments, it is not surprising that the aspirations of the five-year strategy were not being realized.

The diplomatic initiatives of 2018 were motivated in part by a desire to obtain significant economic benefits, especially relief from sanctions. But the failure of the Hanoi Summit resulted in an abrupt shift in expectations and the need to face up to the likelihood of increasingly difficult economic conditions. At a meeting of the Central Committee in December 2019, Kim Jong Un acknowledged this reality and sharply criticized economic management. He called for more aggressive efforts to improve Cabinet-centered economic management, pursue self-reliance at the state, local and individual levels, continue implementing the RMSSC enterprise management reforms, and ensure all enterprises conform to state guidance to best meet the needs of the people.[3] Only a month later, COVID-19 arrived, and North Korea’s responses foreclosed serious efforts to move forward on this agenda.

On November 4, 2020, the SPA adopted changes to the Enterprise law. The official report by KCNA states that these changes:

…stipulate contents of making enterprises labor-, energy-, cost-, and land-saving ones and of making the employees patriotic working people who regard the spirit of the economy part of their mental qualities….The enterprise law refers to issues which all the units must observe when organizing new enterprises or when their affiliations change. It also stipulates that the production and business management must be done under the unified guidance and strategic control of the state and on socialist principles.[4]

While details are unclear, two articles by Daily NK indicate that some provisions would encourage foreign trade and reduce to ten percent of profits what private kiji are required to pay to the state. Others would require participation of party representatives in the management teams of all enterprises to ensure the strategic guidance of the state is being respected and that the finances of the enterprises are transparent for taxation purposes.[5]

There is concern about the potential impact of such changes on markets and private entrepreneurship, but more information is needed to understand the details, intentions and practical significance of these developments. The decision to place party representatives back on enterprise management teams could be designed to assert party influence on enterprise decision making.

In light of the failed effort to require bond sales to raise foreign exchange for the state in 2020, some skepticism is understandable. It is also hard to believe, given the growth and success of markets and private entrepreneurship over the past decade and the fallout from the party’s last effort to curtail markets, that any attempt to substantially erode public dependence on markets would be accepted without pushback.

At the recent Central Committee meeting, Premier Kim Tok Hun pledged:

… to perfect feasible methodology for making the working people practical master of economic management by correctly enforcing the socialist system of responsible business operation while readjusting and rearranging system and order of economic work and practicing the unified guidance and strategic management of the State over economic work.”[6]

U Sang Chol, director of the Central Public Prosecutor’s Office, also said he would “ensure that all legal measures are taken to make every field and enterprise thoroughly implement the Party’s economic policy” and that he would “offensively and continuously keep legal watch over units which wantonly violate the socialist economic management order within their own enclosure on the strength of ‘special organs’ while being away from control by law,” and “intensify the education on the law among the economic officials.”[7] Thus, the Central Committee meeting set in place authorities and mechanisms for ongoing adaptation of economic management policies and strengthened the role of the legal system for enforcement of government regulation.

While these changes can be viewed as enabling state suppression of private economic activity, an alternative assessment that should be explored is whether they could represent a thoughtful homegrown effort to integrate and conform state and privately managed economic activities with goals that are in the interests of both the nation and the common people, and are defined in a rehabilitated party system. More transparency and accountability in the relationship between economic actors and political authorities, and in the social contract between the state and people, would be consistent with North Korea moving down a path of becoming a “normal” country that relies on transparency, regulation and mechanisms to ensure compliance, even if couched in socialist ideology.

If “self-reliance” is understood to actually embrace national, local and individual interests and responsibility, then Kim Jong Un’s transformative domestic agenda should be something to understand better, endorse and nurture going forward, if it can be aligned with values and principles of governance broadly accepted in the international community.

Economic and Human Security as Crucial Parts of the Security Equation

In contemplating the security challenges facing North Korea today that animate both its military and economic strategies, it is important to acknowledge that economic security is a crucial part of the overall national security equation. In the current COVID-19 crisis, human security is also critical as the country faces health risks and food insecurity. Coming out of the Party Congress and SPA meetings in January and the February Central Committee meeting, North Korea, like most countries today, has to prioritize getting control of the pandemic, accept the necessity of economic hardship, and find a path forward that is supported by the political establishment and common people.

While Kim Jong Un’s speeches have clarified national priorities and aspirations, they have not provided a road map towards a secure future. That path could take different directions depending on the strategies for engaging North Korea by its neighboring countries and the Biden administration. If confronted with continued international isolation or even harsher sanctions, the North Korean economy is most likely to experience deeper recession and social distress unlike anything seen since the mid-1990s.

Even though the system is much more resilient today, largely because of the role of markets in meeting basic needs, the ability of the state to raise revenues necessary for essential services can be expected to be severely constrained. Even North Korea’s successes in sanctions evasion are now compromised by the impact of the COVID-19 pandemic in China and other countries.

Implications for US, South Korean and Global Policies for Engagement

Efforts to explore North Korean willingness to engage in new security-oriented diplomatic initiatives should take into account the importance it attaches to economic security and future economic development, and its commitment to protecting human security needs even at the cost of economic distress. Realistic solutions to fulfilling these critical concerns must go beyond measured sanctions relief and humanitarian aid. Appropriate policies, improved management capacity and greater investments will also be needed to build a resilient health system and sustainable food security.

Meeting these needs will require a willingness to listen to North Korean perspectives in a mutually respectful way to enable policy dialogue on the successful practices and development lessons of other countries, acceptable technical assistance to support capacity building, and agreement on targeted investments. Both bilateral and multilateral support should be explored in the diplomatic process, including an expanded role for United Nations operational agencies and the development banks, which have been actively working with other countries facing these human security issues. A good starting point would be to establish direct consultations with high-level officials in the Cabinet and party to explore areas where such cooperation might be feasible. Track II meetings could help mutual learning and sharing of perspectives to support a diplomatic process.

Consultations on the longer-term challenges of the new five-year economic development plan and the macroeconomic and microeconomic management concerns facing its implementation should also be considered if economic security issues become part of a comprehensive security dialogue and diplomatic process. It may finally be the time to consider supporting International Monetary Fund involvement to help put North Korea on a long-term path towards a more transparent and economically secure future.

The post The Road Ahead for the North Korean Economy After the Party Congress appeared first on 38 North.


Source: 38 North
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