Is there or Is there not reform in the DPRK? And some recommendations

Andrei Lankov is upbeat. He believes reforms are really underway in North Korea with agricultural yields to prove it. But don’t pop the champagne yet because Dr. Lankov is also wary of how the reforms will not go far enough to fundamentally alter North Korea’s state of affairs.

His concerns are as follows:

  • Taking steps to liberalize the agricultural sector is logical because they harbor very little political risk, but will not achieve substantial changes unless Pyongyang extends similar reforms to the urban industrial sector;
  • Managerial freedom to enhance efficiency in industry also carries the danger of increasing waste in a command economy;
  • SEZs(special economic zones) offer a place for foreign investors to spur development, but investments will not be forthcoming while there remains considerable sovereign risk.

As a seasoned veteran of North Korean studies, Dr. Lankov provides valuable insights – but there is room for further analysis. In particular, renewed assessment of the country’s economy calls for some changes to Dr. Lankov’s conclusions.

In brief, here is a summary:

  • There are indeed substantial changes in North Korea, but they are unlikely the result of any reforms underscored in the “June 28 policy” – rather Pyongyang appears to be undertaking policies aimed at curbing inflation.
  • Although North Korea is a largely urbanized country, its economy is primarily agricultural; therefore, liberalizing the agricultural sector will have a huge impact on society with or without associated changes in the urban industrial sector.
  • Furthermore, contrary to what Dr. Lankov believes, such actions carry huge political risk.

When June 28 reforms were delayed in October 2012, we noted that one of the principal challenges awaiting the North Korean regime was controlling inflation. The decision to push back the implementation of reform policies could be easily understood given the market conditions at the time. As long as food prices remained heavily volatile, Pyongyang would not risk supply shocks to its urban denizens. Dr. Aidan Foster-Carter reached somewhat similar conclusions on Pyongyang’s fear of being unable to feed its cities, noting that “it is not clear that the state will be able to requisition enough to feed what is still a mostly urban society… [North Korea] does not have many people left on the land.”

Instability in the food market goes back to the disastrous revaluation of the KPW in the winter of 2009-10. The botched attempt to control inflation by simply issuing a new currency so seriously affected prices in the market that it led to widespread abandonment of the national currency in favor of RMB and dollars, which in turn further exacerbated volatility of prices denominated in KPW. Although there were efforts to curb inflation through price controls in the days leading up to the scheduled implementation of the June 28 reforms, it proved insufficient in making enough short-term changes for policymakers to feel comfortable moving forward with wider liberalization of the agricultural sector.

Given these challenges, the stabilization of food prices in 2013 is all the more remarkable. Signs of decreased volatility was evident since January 2013, continuing through the traditionally “lean” summer seasons. This was unlikely to be the result of a good harvest from 2012 as the FAO assessment estimated a 207,000 ton grain deficit (compared to the 40,000 tonne deficit in 2013). Furthermore, foreign assistance packages sent from Russia and China were most likely weighed down by the country’s fragile transportation infrastructure, only marginally contributing to price stability.

So what curbed the volatility in North Korea’s food market? Stability in food prices went hand-in-hand with the KPW bouncing back from a foreign exchange freefall against the US dollar, which led us to conclude (alongside evidence of North Korea’s gold export and comparison of rice prices in Hyesan) that the central government was actively bolstering the exchange rate value of the KPW. This in turn led to improved market conditions and stable prices. The DPRK Food Policy Blog explored alternative scenarios through which this phenomenon could have occurred, but it seems very likely that the central government in Pyongyang is responding to the need to ensure the stability of KPW as a first step towards broader changes in its economy.

But Dr. Lankov suggests that reforms are already being implemented, citing an inside source that claimed an immediate 30% increase in output as a result of the policy changes. The 2013 FAO food security assessment did show incredible growth in grain output during the year; however, as Chris Green noted, gains in yields could have been the result of favorable weather conditions (the absence of major typhoons like Bolaven that pounded North Korea in August 2012) or the sector merely scraping a modest recovery after hitting a trough. It is not sufficient evidence to prove that the state is implementing widespread agrarian reforms.

In fact, even if the state had been implementing reforms outlined in the June 28 policies, it is unclear if that would actually result in growth in yields since the state would still control the supply of key inputs such as fuel and fertilizers, an issue noted time and time again by this blog. Incentivizing production without implementing complementary institutional and structural changes will not result in sustained growth. Interestingly, Dr. Lankov seems to acknowledge this fact for the industrial sector but not for the agricultural sector.

This still leaves the question of whether Pyongyang is capable of pushing forward agrarian reforms. Here Dr. Lankov’s analysis is slightly contradictory – the North Korean state could not have delayed the reforms out of fear of losing control of the rural population while simultaneously regarding reforms as a low-risk policy with considerable gains. Perhaps there was a doctrinal shift between October of 2012 and sometime in early 2013 – but more likely than not, Pyongyang is not aggressively pursuing the June 28 Policy because the political risks, emanating not from the rural population but from the urban population, are too high.

Given how the majority of North Koreans live in urban areas, it is unsurprising that North Korea’s economic policies seemingly favor city dwellers, in particular those living in Pyongyang, over those who live in the periphery. For years the central government paid generous wages to workers in Pyongyang (see the cases in 1955 and 2013), allowing the capital to capture much of the resources in the country. At the same time, economic losses were exported to the periphery in the form of inflation, contributing to the volatility in prices. The cumulative consequence of this policy was the weakening of Pyongyang’s control over the national economy as people in the periphery abandoned KPW in favor of more stable foreign currencies.

Initiating June 28 reform and transferring some of the purchasing power (via the sale of privately-held grain by farmers) to the rural sector would balance some of the disparity caused by Pyongyang’s inflationary policies and restore confidence in the national currency. However, to do so would diminish the capital’s dominance over the economy. And angry urbanites are more corrosive to a closed authoritarian system than subversive farmers. Decline in living standards in Pyongyang could sow the seeds of dissent – this is most likely the risk that the central planning body is assessing.

Nonetheless, agrarian reform is a good idea – it will help stabilize the currency and form the basis for market engagement. This in turn, it will help better ensure food security in cities as well as the peripheries.

So here are some recommendations for the North Korean state:

  • Engage in aggressive agrarian reform that not only entitles farmers a larger share of the grain output, but also de jure legalizes the ownership of informal private plots – this will pave the path towards the eventual liberalization of the agricultural sector;
  • Promote private trade of agricultural inputs and outputs (“vertical” chains of mutually profitable production arrangements a la Chayanov) – this will ensure both food acquisition in urban areas and allow the markets to recognize relative scarcities in agricultural production, thereby enhancing output;
  • Focus on exports to China to service imports and maintain the exchange rate value of KPW.

Associated changes in urban-industrial sector should occur as well, but stabilizing food prices first will not only establish market conditions favorable for further development, but also abolish the looming food insecurity that causes incalculable suffering.

If Pyongyang wants to hedge its own long-term economic survival like the Chinese Communist Party then it is imperative for the North Korean leadership to demonstrate what Teodor Shanin called “the courage of retreat.” The question is whether Kim Jong-un is willing to suffer the short-term risks of engaging in such reforms.

This blog will continue to weigh in on what reforms should take precedence while looking for signs of change in the market.


About Yong Kwon

I develop trade advocacy strategies for a DC-based consulting firm. Studied economic history at the London School of Economics, and can be found on twitter at @ykwon88
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4 Responses to Is there or Is there not reform in the DPRK? And some recommendations

  1. Pingback: The Specter of Inflation: Soviet case study and a modern solution | Rice and Iron

  2. Pingback: After Jang Sung-taek: Can North Korea brave the economic tempest? | Rice and Iron

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