N. Korea’s 2002 reforms have lasting consequences

A woman points at a flat-screen TV on sale at the 16th Pyongyang Spring International Trade Fair at the Three-Revolution Exhibition Hall in Pyongyang, North Korea, Wednesday, May 15, 2013. The fair featured North Korean goods as well as products from China, Malaysia, Indonesia, Germany, Switzerland, Australia and Italy, including washing machines, tablet computers and TVs. The popularity of electronic products at the exhibition reflected a growing interesting in appliances and technology in North Korea, despite the country?s chronic power shortage problem. (Photo : AP Photo/Jon Chol Jin)

Half-forgotten N. Korean economic reforms not to be overlooked

One of the important peculiarities of North Korea is its stubborn unwillingness to take the reform path trodden thus far by Vietnam and China. Due to a number of political and social reasons, for decades the North Korean government has worked hard to keep the system which once was patterned upon Stalin’s USSR.

However, in the recent history of North Korea there was one remarkable, if half-forgotten, episode in which the North Korean authorities came close to initiating genuine reforms. This episode is officially known as the “1st of July Economic Management Improvement Measures.” These “measures” were implemented in 2002, only to be quietly abandoned a couple of years later (well, some vestiges of the 2002 Measures have survived).

The story of the 2002 Measures is not purely of historical and academic interest. These reforms were initiated by a man who was recently appointed as North Korea’s premier – his name is Pak Pong Ju, and he is widely reputed to be one of North Korea’s top reform-orientated officials. There is therefore some hope that a round of reforms may be in the offing, so it makes sense to have a look at how the issue was approached last time.

To start with, the 2002 Measures were never officially called ‘reforms’. In official North Korean parlance ‘reform’ is a dirty word, it is the name of a clever trick played by imperialists that aims to lure socialist states into a capitalist trap. Therefore, the 2002 Measures were never described as ‘reforms’.

Private market activities legalized

We can afford to avoid such ideological formalities, though, so from now on let’s just call the measures ‘reforms’, after all they were indeed reforms despite whatever was said by the North Korean propagandists at the time.

The reforms were implemented in 2002, as North Korea was beginning to recover from a cataclysmic famine. The state economy had collapsed, and industrial production had halved (compared to 1990 levels). A booming private sector had begun to take over, so many North Koreans had begun to run their own technically illegal market stalls, farm their own technically illegal private farms, and work in technically illegal private workshops. The public distribution system ceased to function, and people therefore had to buy grain and other basic foodstuffs at private markets – where prices were much higher than in the state retail system.

Therefore the 2002 reforms began from the markets. As a part of the reform package, many kinds of private market activities were legalized. Among other things it became legal to sell industrial goods in the markets where it had hitherto been legal only to buy and sell foodstuffs. Many other restrictions on market activities were also lifted.

Back in 2002-03, this was often perceived by the foreign observers as a major breakthrough. My own experience, though, makes me suspect that in this regard the significance of the 2002 reforms has been seriously overblown. Having spoken to dozens of market operators and vendors, I was somewhat surprised to discover that most of these people do not consider the 2002 reforms to be a significant turning point. It appears that some of the merchants did not even realize that their activities had suddenly become legal in 2002.

One should not be surprised about this: in many regards, the 2002 reforms were not so ground-breaking as they initially appeared. In essence, through the reforms the government lifted many bans that had been all but universally ignored for years. It ex post facto legalized activities that it was unable to control.

Dramatic increase in price and wages

Far more significant were changes in prices and wages. After the reforms, state prices of food stuffs and household goods, as well as official wages in state-run industries increased dramatically. Prior to the 2002 reforms, a kilo of rice if delivered through the public distribution system – the only legal way to obtain rice if you live in the city – cost 0.08 won. After the reform, the price increased to 44 won, or some 550 times.

Wages increased as well, though less dramatically. At the time of the reforms, the average monthly salary was approximately 90 won and would barely suffice to buy 2 kilos of rice at the market. As a result of the reforms, the average salary increased to 2,000-2,500 won overnight.
At the same time, the rationing system was quietly discarded. It was assumed that from now on North Koreans would buy rice at market price but in state-run shops. The shops were also given the additional right to freely purchase the necessary supplies, thus becoming much more similar to shops in a market economy.

From the little evidence that has surfaced thus far, it appears that the masterminds of the reforms hoped to harmonize state and market retail prices. The initial assumption was that inflation would not become a serious problem. This was the fateful error of the planners, for the following couple of years North Korea experienced an outburst of hyperinflation, with the market price of rice increasing from 44 won to roughly 900 won per kilo.

For anyone with even a basic understanding of how markets work this is easy to understand and explain, but it seems that even among the best North Korean decision-makers this understanding was lacking. Therefore, contrary to the expectations that had underpinned the reforms, markets remained the major centres of trade in grain and other basic food stuffs – state-run retail outlets remained on the side lines.

This runaway inflation was one of the reasons why the reforms soon came to be perceived as a failure by the top political leadership who in 2005 began to attempt to move back to a state-command distribution system – albeit without much success. At the same time, the 2002 reforms meant that North Koreans had to start paying for a number of services which had been heavily subsidized or free before. For example, North Koreans were required to pay rent for their houses. Since their houses are considered to be state property, the rent has to go to the state as well.

Runaway inflation

The 2002 reforms also influenced the industrial management system, even though the details remain murky – no detailed reports about the reforms have ever been published by the North Korean media and therefore our knowledge is based on some isolated references in the North Korean press, as well as refugee testimony.

It appears that in the state sector, factory managers were given a remarkable amount of freedom. Among other things, it seems that they were allowed to pay higher wages to encourage/reward work. Managers were also given some freedom in hiring and firing personnel. Central control over production plans was relaxed as well.

Nonetheless, such measures appear to have been short-lived. By late 2003, if not earlier, the North Korean government decided that they had gone too far, the outburst of inflation obviously must have been one of the factors behind them reaching this conclusion. Even though a manager could double or even triple a salary for a worker, this did not prove to be useful when retail prices increased some twenty times in 18 months. Therefore, official wages remained unattractive.

Reforms were quietly rolled back between 2003 and 2005. Pak Pong Ju lost his job and was sent to the countryside in 2007 – he spent a few years as the chief manager of a rather large chemical plant, only to make a comeback with the ascension of Kim Jong Un.

Therefore, the 2002 reforms remain a rather isolated episode, but one cannot rule out the possibility of this half-baked attempt at structure reform having some serious consequences for the future of North Korea.

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