In an economic bind, Pyongyang dances around reform
PYONGYANG Thousands of troops, row upon row of tanks and ballistic missiles. The meticulously choreographed parade on Oct. 10 to mark the 70th anniversary of North Korea's ruling Workers' Party was intended to showcase its military might to the world. But while less obvious to outsiders, the regime is equally keen to revamp its outdated economic system.
Central to this effort, being spearheaded by supreme leader Kim Jong Un, is the attempt to boost the productivity of farms and factories by giving those who run them more decision-making power and greater accountability.
Kim is also setting up special economic zones and courting foreign investment more seriously than his predecessors.
In late September, I visited North Korea as part of a delegation of Japanese economists. During the weeklong tour, we had a firsthand look at, among other things, major construction sites, shopping complexes, an international trade fair, collective farms and tourist resorts. We also interviewed senior researchers at government think tanks.
My overall impression is that of a country facing a profound dilemma: How can an isolated dictatorship take in foreign technologies, ideas and money without jeopardizing its grip on power?
MORE POWER, MORE PRESSURE North Korea's two economic policy priorities at the moment are promoting science and technology and improving its citizens' living standards, according to Kim Sang Hak, division director at government think tank the Academy of Social Science, Economy Institute.
"Our economy has been improving since 2000, but production has yet to normalize in some sectors," Kim said, adding that North Korea has switched to making economic plans on a yearly basis, rather than drawing up multiyear blueprints as before.
Kim Jong Un outlined a basic principle for revamping the economy in a key speech on May 30 last year. Referred to by locals as the "5/30 discourse," the speech called for more freedom and responsibility at factories and on collective farms.
Under this principle, factory managers now have greater discretion in planning, production and worker management. They also have more control over their finances. They are now allowed to use profits to raise wages or fund research and development, for example.
Pyongyang also lets certain operators deal with foreign businesses, set up joint ventures and launch joint production.
The idea behind these changes is to tap citizens' ingenuity. With the country facing economic sanctions and foreign currency shortages, "the state cannot ensure that factories will get the necessary materials and equipment," Kim of the government think tank said. If they do not get what they need, "factories end up having surplus labor."
In other words, managers must take the initiative in seeking out new business opportunities and finding ways to utilize their surplus workforce.
A BIT BRIGHTER The 11th Pyongyang Autumn International Trade Fair, held Sept. 21-24 at the capital's Three-Revolution Exhibition center, attracted 305 companies from a total of 16 economies, including China, Malaysia, Singapore, Germany and Taiwan.
Of those, 153 were North Korean, according to Ho Pyong Chol, director of Korean International Exhibition, the fair's organizer. It is a marked change from previous years, when only 40 or 50 local companies took part.
Ho attributed the sharp increase to the "industrial revolution policy" of Kim Jong Il, the former leader and Kim Jong Un's late father, as well as to the introduction of computerized numerical control systems. As local companies became more confident in the quality of their products, "their desire to promote their offerings has grown," Ho explained.
Products on display at the fair included consumer electronics, such as flat-panel television sets and personal computers from a North Korea-China joint venture, as well as machinery and building materials.
Outside the exhibition hall, Chinese trucks and passenger cars were on display, as were electric bicycles, a popular product in Pyongyang nowadays.
Next, we visited the Gwangbok District Commercial Center, a supermarket jointly set up recently by Chinese and North Korean companies. According to the employee who showed us around, 70% of the goods sold at the store are North Korean made.
"More than 90% of food items we sell are domestically sourced," he said. "Chinese products used to dominate our food section, but it has changed as awareness about food safety grows."
The Kim leadership has also pressed the military industry to expand production of consumer goods. This and the growing competition among newly empowered companies have contributed to the increased availability of products.
When I last visited the North Korean capital, in 1997, the country was still reeling from the collapse of the Soviet Union and grappling with devastating natural disasters. Food and other daily necessities were scarce. Today, Pyongyang, the showpiece of the regime, is a different city. There are more cars on the streets, and some areas of the capital now even experience traffic jams during rush hour.
But whether this newfound affluence can be attributed to the leadership's efforts to update the country's economic model is unclear.
A MODEL OF MOTIVATION At the Jangcheon farm, about a 30-minute drive from central Pyongyang, we were shown the fruits of Kim Jong Un's economic reform efforts in the agriculture sector. The farm consists of 18 public facilities, 422 residential units and 665 greenhouses, covering a total of 30 hectares. Home to 1,300 workers and a total population of 3,200, it falls into the category of midsize farms by the capital's standards.
This is a model collective farm, reformed under the instructions of the supreme leader after he visited it in June last year, and Pyongyang is keen to show it off.
Cho Yong Pyo, chief engineer at the farm, told us that its three main products are greenhouse vegetables, livestock and grains. For vegetables, each worker is put in charge of a section measuring between 1,200 sq. meters and 1,500 sq. meters, and the name of the manager is displayed at each greenhouse.
Under the new economic policy, the state gives only rough guidelines on what proportion of a farm's overall output comes from vegetables, rice, livestock or other produce.
Workers are also allowed to use any surplus crops left over after meeting government quotas as they see fit, such as selling them at the farm's own store or at public markets.
According to Kim of the Academy of Social Science, North Korea's grain production increased to 5.71 million tons in 2014 from 5.6 million tons the prior year.
"Farmers' desire to produce more has increased under the system of letting each of them take charge of a set plot," Kim said. "This has led to them trying to introduce cutting-edge farming technologies."
At the Jangcheon farm, workers live either in apartment units or in single-family houses, all of which use solar power for their electricity and hot water. The single-family houses are equipped with a system that harvests methane from livestock waste to use as gas for cooking. The government plans to build one model collective farm like this in each province and county by next year.
DON'T CALL IT "REFORM" The method of stimulating productivity by giving each economic unit more decision-making power seems similar to what Deng Xiaoping implemented in the earlier stages of China's economic reform. But North Korean officials maintain that their policy is neither the first step toward reforming and opening the country's economy nor an attempt to introduce a market economy.
"Our measures have been taken to advance our planned economy. Their aims are to consolidate the state's leadership power and stimulate the creative desire among the state's lower apparatuses," the academy's Kim said.
Indeed, we saw firsthand on multiple occasions the firm grip that the command economy still has on North Korean society, as well as the tremendous pressure placed on workers to meet the ruling party's lofty goals.
In Pyongyang, for example, we saw laborers working well after dark to complete high-rise apartments for scientists so that they would be ready in time for the 70th anniversary event. We also learned that various factories had been told to meet their annual quotas much earlier to help make the Oct. 10 ceremony a success. Our request for one factory tour was declined because, in the words of its manager, "we are too busy to accept visitors."
The North Korean government has a history of placing tremendous demands on citizens and the economy to satisfy its grandiose visions. It built massive structures and historic monuments to mark what it saw as milestones, such as the World Festival of Youth and Students, held to rival the 1988 Seoul Olympic Games, and the 70th anniversary of the birth of Kim Il Sung, the country's founder. Extravagant construction projects to mark these occasions often exhausted the already feeble economy and left the people struggling for years afterward.
A major power station at Mount Paektu was completed in just over four months, despite being the country's most challenging construction project in the past decade, according to the Korean Central News Agency. With the collapse of a Pyongyang high-rise apartment last May still fresh in people's minds, foreign experts have expressed concerns about the safety of a structure built in such haste.
Meanwhile, the online edition of South Korean daily Chosun Ilbo reported that North Korea probably spent about $1.4 billion for the Oct. 10 event, quoting an unnamed source close to Pyongyang. That amounts to just under a fifth of the country's entire annual trade of $7.6 billion.
Atsushi Ijuin is a principal economist at the Japan Center for Economic Research. This is the first part of a two-part series.