Wednesday, December 22, 2021

Kim Jong-un's First Decade - A Decade of Market Growth

This is the fourth and final of the supplemental articles for the Kim Jong-un's First Decade in Power series. It details the various infrastructure changes and weapon developments of North Korea's conventional forces over the last decade.

Undated image from the North Korean government (via Naenara.com) of the interior of a marketplace in Pyongyang.

Introduction

Modern markets in North Korea trace their history back to the chaos of the famine of 1994-98 that killed upwards of 1 million people through starvation and related diseases.

As the central government’s ability to feed the people through the Public Distribution System failed (previously a citizen’s primary source of food), people had to make the decision to either abide by state ideology and starve or they could take matters into their own hands.

Since the vast majority of men were either serving in the military or still forced to report to derelict state factories for “work”, women took the lead and created the foundations of today’s market system that has spawned an entirely new generation, the jangmadang generation (those who came of age after the famine and during the period of marketization).

What began as highly illegal activity in the black markets has, twenty-three years after the famine, evolved into a series of legal and quasi-legal markets that has resulted in an entire generation never knowing reliance on state rations and who are unlikely to give up that freedom (and a greater selection of goods) to go back to the old days of the Public Distribution System’s monopoly.

The evolution of markets has weakened the regime’s internal travel restrictions and prompted an interest in entrepreneurship that can be seen in the creation of private transportation companies and a booming housing market, enabling the development of a middle class for the first time in North Korea’s history.

The regime has grappled with this loss of control through cracking down on market activity and, at times, trying to bring it under central authority by giving it a level of legitimacy (particularly in Kim Jong-un’s first several years as leader). But while Pyongyang is still trying to adapt to the reality that markets are likely here to stay, the wheels of commerce have not stood still. Today there are at least 477 markets throughout the country providing everything from rice and corn to home goods, foreign entertainment, and medicine.

Although there has been considerable research into early market development and its impact on people’s lives, I want to take this opportunity to show the growth arc of markets over the last decade and to reiterate that, absent the recent effects of COVID-19, market activity has not stalled or reached a saturation point but remains a dynamic economic force both because of and in spite of the regime.

 

A quick note: I have tried to tailor this report to focus on the markets and on how economic policies have affected them. More details and a broader view on economic policy under Kim Jong-un will be the focus of an upcoming regular article of the series.

 

Early Policies under Kim Jong-un

Perhaps due to his preoccupation with consolidating power or perhaps because he realized the state still couldn’t be the sole provider of people’s needs as in the days of Kim Il-sung, Kim Jong-un initially took a wait-and-see approach to the markets with the occasional foray into reform.

Exactly how open he was to reform is up for debate, but there is clear evidence that he was not only willing to continue the tacit approval of the growing market economy as his father had been forced to in the wake of the famine, but he was also willing to become the first North Korean ruler to implement market-oriented reforms (at least for a time) that positively affected the average person.

The government has tried to integrate the market economy into the centralized command economy by allowing the markets to exist while taxing them and regulating the kinds of goods that are allowed to be sold. As Prof. Andrei Lankov summarized in his 2016 report The Resurgence of a Market Economy in North Korea, “The government’s approach to the private sector has been mixed. It generally accepts private enterprise as a necessary evil, but for political reasons, it is not prepared to legalize it completely. Kim Jong-un’s government is more tolerant of private enterprise than its predecessors.” However, “the outright legalization of the private sector appears unlikely.”

Kim has also sought to compete with the markets by modernizing an ever-growing number of state-owned department stores. While these stores are not part of the ground-up marketization that has spawned hundreds of trading locations across the country, they have helped to fill a need for those who have managed to make it into the monied-class through private economic activity, particularly in Pyongyang.

With this mix of private and state options that currently exist, those with enough disposable cash can have access to bulk rice and illegal South Korean TV shows via the trading stalls and can then go purchase $1,000 designer handbags in department stores – with the added bonus of not risking getting arrested as the store's products are fully sanctioned.

But legitimizing the markets themselves was only one part of the economic puzzle that has led to a relatively robust market economy.


Chart showing the relative stability of the black market value of the North Korean won prior to the COVID-19 trade restrictions. Image source: DailyNK/Bloomberg.

The government has also taken a lax approach to the black market exchange rate of the won. Officially, 100 won is roughly equal to $1 USD, but in the markets, it’s well over 5,000:1.

Instead of instituting more disastrous currency reforms as it did in 2009, it has allowed the black market rate to serve as the won’s true indicator of value while being more aggressive in regulating the use of foreign currency. So, people have been able to save and invest using the North Korean won and those savings have not been at risk of arbitrary confiscation or a dramatic devaluation at the hands of the central bank in years.

This sense of stability has further strengthened the marketization process up and down the entire system.

In 2012, in one of Kim’s first major economic changes, he allowed farmers to keep their surplus produce to sell or trade and to keep any profits. Prior to the famine, selling food from state-controlled farms was highly regulated. Now, farmers would have incentives to keep working on government farms (instead of leaving to tend to their own illegal plots). Under this plan, improving agricultural output to alleviate food shortages was the state’s goal. However, it had the secondary effect of filling the markets with more and more foodstuffs and enabled farmers who’d otherwise be forced to rely on less than $15 a month in wages to earn enough money to live and not merely subsist.

Initially, it was projected that (so long as they met state quotas) most farmers would end up being able to sell 30-50% of their harvest in the markets. Enabling food to be sold and distributed locally is also highly beneficial during times of food scarcity as it improves the efficiency of distribution and ensures supplies still exist even as prices rise.

With the addition of new initiatives by the regime to dramatically increase the allowed size of ‘kitchen gardens’ from 100 sq. m. to 3,000 sq. m., by 2015, data from the UN Food and Agriculture Organization and anecdotal reports from within the country seemed to show that these early reforms by Kim Jong-un were bearing fruit.

 

Another major part to why markets continued to thrive has been the end of the Songun (military-first) policy. Instituted by Kim Jong-il to give the military a greater role over economic planning and the prioritization of resources when the regime saw itself under extreme external threat, the policy created massive distortions in the economy and diverted needed investment away from light industry and agriculture.

Kim Jong-un has worked to dismantle Songun in favor of his Byungjin Line or “parallel development” that seeks to pursue nuclear weapons without neglecting the domestic economy. A refocused approach to bolstering light industry and improving the quality of consumer goods has led to some improvements in the quality and diversity of available goods while also seeing factories in various sectors modernized.

 

Market Growth

In 2018 the Center for Strategic and International Security released a report on North Korea’s markets. Their reporting revealed that there were at least 436 officially sanctioned markets in the country and that the government received $58.6 million each year from stall rental fees and taxes.

Additional CSIS reports showed that a substantial portion of citizens earn at least 75% of their income from market activities. This finding fits well within what others have reported including New Focus International and defector testimony.

Based on the AccessDPRK Mapping Project (2021), this supplemental report provides an update on the number of markets in the country.

There are at least 477 markets in North Korea with 20 being identified as informal street markets and 457 being official markets. Of the official markets, some are still open-air sites with no permanent buildings. Because of this, it can be difficult to ascertain changes to the level of activity occurring there. So, I will only be focusing on the 441 markets that have permanent vendor stalls, as their construction and removal can be tracked across time, providing better direct evidence for the health of the economy in each city.

– A note on methodology, formal markets tend to have a defined boundary wall. Within that boundary can exist vendor stalls plus open ground for overflow capacity. Often, they include both. In cases where a substantial portion of the market is just open space, I have only included the areas occupied by stalls as the market’s “area”, as those stalls are responsible for most of the everyday economic activity that occurs and are the only thing that can be routinely measured. –

This chart shows the total area of the new markets constructed each year.

Since 2011, I have noted thirty-nine newly constructed markets. Of those with precise construction dates (there’s occasionally gaps in Google Earth imagery) two were built in 2011, four in 2012, three in 2013, five in 2014, four in 2016, three in 2017, five in 2018, six in 2019, three in 2020, and one is known to have been constructed in 2021. As this shows, there has been no real decline in the growth rate of markets over the course of the decade until the onset of the COVID-19 pandemic.

A further 114 markets have also grown in size since 2011. In total, there is 1,502,270 sq. m. (16,170,299 sq. ft.) worth of vendor stalls within the 441 market sites reviewed. That’s a net increase of 236,320 sq. m. (2,543,727 sq. ft.) since 2011. There are also tens of thousands of square meters in various overflow spaces outside of the main market buildings, but as these spaces aren’t always clearly delineated and often spill out into the streets or surrounding fields, trying to measure them can become somewhat arbitrary.

The largest single market in the country by area is the Sariwon market located in Kuchon-3 district (38.501407° 125.778737°). With at least 29,000 sq. m. of space, it’s over 8,000 sq. m. larger than the next largest market in North Korea. The market was constructed in a former stadium and includes a large central building surrounded by dozens of smaller structures that hold vendor stalls and other facilities.


Some other market-related stats are:

  • The newest market is in Hamhung. Constructed between 2020-2021, this small market (39.953089° 127.560062°) provides facilities to the growing districts around the Chemical Materials Institute and Tonghungsan Machine Plant.
  • There are 26 markets greater than 10,000 sq. m. in size.
  • There are 95 markets with less than 1,000 sq. m. worth of vendor stalls.
  • The smallest market (as best as I can determine using Google Earth measurements) is in the town of Hwaam (40.675307° 126.451652°) and only has ~130 sq. m. of active space. It does have some overflow area, but currently, there is just a small cluster of permanent structures.
  • Although it wasn’t until 2002 that the government allowed officially sanctioned markets to operate, based on the available Google Earth imagery, at least 56 market sites with permanently constructed buildings had already been in existence prior to 2002. These include markets in Anbyon, Sinpo, Wonsan, and at least eleven in Pyongyang. These are, of course, in addition to the many open-air street markets that also existed at the time that were later converted to permanent sites.
  • Based on a 2014-16 survey, there are over 600,000 individual vendor stalls within official markets. Today, that figure is likely closer to 750,000 as substantially more markets have been identified and others have grown.

 

Different approaches to the measurement of market sizes and the addition of new markets constructed since the 2018 CSIS market report makes directly estimating government revenue from that report difficult. However, using their published estimates for government revenue from each market, the range of annual revenue each square meter of market space brings in is between $26.56 and $36.05. Applying those figures to the current amount of active stall space as measured in this supplemental report, the central government receives between $39.7 million and $54 million in revenue. If one were to include open-air markets (which are variable in size) or include the overflow spaces as part of the revenue-making area, as of 2021, the government brings in over $60 million each year.


Later Changes and the Effect of COVID

Street vendors selling produce near the highway running from Nampo to Kaesong. Image source: Uwe Brodrecht, Oct. 13, 2015, via Commons (CC 2.0). Image has been cropped.

 Although Kim has been incredibly open about economic and food troubles compared to his father, he still has an obligation to strengthen the state, stamp out threats to the regime, and manage the expectations of the people. Those threats include private markets and even a rising standard of living.

The desire to control the markets is more than just about the drive for greater economic control from Pyongyang. Markets form a core part of nearly every DPRK citizen’s daily life. They are a source for networking, sharing gossip (including views that could be viewed as treasonous), and are a key source of electronic devices and digital media that further erode the information cordon that has existed for generations.

Market activity has helped to raise people’s expectations of what a decent life is, and if the government can’t assist in raising standards of living, people tend to decide those in charge are expendable. This threat is why Kim Jong-il, at best, engaged in benign neglect of growing market forces within the country but would not have countenanced anything as dangerous as reform, as reform brought with it its own risks to the stability of the regime.

Kim Jong-un, on the other hand, has calculated that he must allow for reforms, though limited, to continue the country’s economic growth as he has staked a good portion of his legitimacy on improving the economic condition of the country, repeatedly calling out failures and promising a final end to food shortages.

This has created an internal contradiction, where reforms must take place for the people to survive but they must also be applied as sparingly as possible if the regime is to maintain its ultimate authority rooted in the systems created by Kimilsungism-Kimjongilism. To address this, new economic initiatives are often kneecapped to limit their spread and others are announced but never followed up on.

Kim “seems to be doing everything [he] can to keep up Stalinist appearances and…probably believes that he cannot abandon socialist rhetoric without risking his legitimacy,” as Peter Ward told 38 North in December 2017.

Market regulations, agricultural and industrial reforms, changes to how banking and the accumulation of savings work, have all been tweaked over time. And some have had limited success in the places where they’ve been tried, but Kim has yet to commit to anything more than shallow reforms.

One group that has taken advantage of ‘reforms on paper’ is corrupt officials. These individuals, many at high levels of government, are an indispensable cog in the way markets currently work in North Korea. Bribes yield permits and licenses, and further bribes shield entrepreneurs from the more serious repercussions that would otherwise result in their activity. These bribes and kickbacks end up becoming a major source of income for thousands of security officials and bureaucrats, creating an undercurrent pushing markets forward and diminishing any momentum that Pyongyang builds to limit those activities.

The problem of corruption has been publicly discussed by Kim Jong-un more than once, and he has recognized the problems to his regime it creates. How to deal with mismanagement and embezzlement without also crushing the market system that corruption has actually assisted in creating is something yet to be resolved.

Occasionally, large-scale crackdowns are conducted and anyone who gets caught up in them will just have to face reality. But more often than not, on a day-to-day basis, most authorities remained happy to turn a blind eye in exchange for bribes and kickbacks so long as the right signals from Pyongyang existed.

 

After ending the Songun policy and ostensibly fulfilling the goals of Byungjin (by developing miniaturized nuclear weapons), by 2018, Kim Jong-un stated that the Party’s focus should be primarily on economic matters once again.

This didn’t necessarily mean making trade easier. It meant growing the economy while reasserting the state’s control. Nonetheless, the evolution of Pyongyang’s approach to markets from illegality to tacit approval, and to the flirtations with quasi market-socialism that finally seemed to be coming into its own. However, in the final nail to the coffin of Kim being a “Swiss-educated reformer”, his authoritarian streak suddenly became much more pronounced at the onset of the COVID-19 pandemic.

COVID-19 was an obvious threat to the country’s survival as North Korea has one of the poorest healthcare systems in the world and relies on international aid to keep illnesses like tuberculosis in check. At the same time, the strict internal travel regulations and the ability of the state to micromanage huge portions of a person’s life meant that North Korea was also uniquely prepared to enforce lockdowns and quarantine measures, both on a per-city level and could even shut off entire provinces from the rest of the country if it wanted.

But the regime didn’t want to only rely on masks or temporary lockdowns, and it offered Kim a prime opportunity to stem the unpleasant tide of outside information and the further erosion of central authority.

In January 2020 it sealed its borders to levels not seen since the days of Kim Il-sung and began to restrict any cross-border trade or communications using the false threat that the surfaces of objects (even dust) were a major carrier of the virus – it’s not.

Kim Jong-un embarked on two tracks in the wake of COVID-19, constructing a border blockade to stop the virus and using the enhanced security measures to go after other ‘threats’ –  growing markets and increasing levels of outside information.

The blockade has meant the de facto suspension of trade with China as movements across the border were prohibited beginning in January 2020. And it has meant physical barriers in the form of miles and miles of double fencing across a large section of the Sino-DPRK border along with hundreds of new guard posts to secure the fence. It has also taken the form of electronic countermeasures to block cell phone signals, track those making calls into China, and to seek out potential defectors.

The combined effects of this blockade have resulted in around an 80% decline in trade, the country’s only lifeline, and there have been fewer defectors making it to South Korea than at any time since the flow of defectors began in the 1990s.

 

The effect on the markets is both commercial and ideological. Basic necessities are now running out and there is a real risk for nationwide food shortages because trade has been so severely restricted. Kim has also cracked down on electronics and media that are so often found in the marketplace in an attempt to shore up the ideological ‘purity’ of the population.

Stories of imprisonment and even executions for possessing foreign media (particularly South Korean content) have spiked since 2019 and the markets have served as a source of this illicit material since their inception.

Small crackdowns have always occurred, typically in the lead-up to holidays and other important events,  but as COVID has provided an additional excuse, Kim has begun larger and larger crackdowns with more severe punishments. DailyNK has provided numerous reports of these actions including one on December 17, 2021 as part of the regime’s attempt to curb capitalistic ‘disorder’ and to improve the people’s ideological fortitude for the 10th anniversary of Kim Jong-il’s death.

These crackdowns have also been focused on the informal markets that still exist in the streets of many North Korean towns. These are still black markets and aren’t part of officially sanctioned economic activity.

The black markets offer those who can’t afford to pay rental fees the ability to still sell and barter. As the situation within North Korea becomes worse due to the lockdowns, black markets are starting to play an ever-increasing role in people’s lives as the sanctioned markets run out of goods.

As they have been described to DailyNK, “Street merchants are people who get by barely by selling food, water and other goods near railway stations, bus terminals, or markets with a lot of pedestrians…Even among all merchants, they’re the most underprivileged.”

The loss of revenue to these black markets, their inherent threat regarding the spread of outside information and cultural trends, and the fact they’re populated by the more vulnerable population make them an easy target for the regime as the recent crisis grows.

After a few years of expanding freedoms, the experiment with sanctioned market activity seems to be entering a more challenging era. As The Economist stated in July 2019, “state media have called for more central control over investment and jobs in the name of fighting corruption. They also argue for the restoration of state control over the food supply and the revival of the public distribution system.”

Exacerbated by floods, the pandemic has only made the food situation worse, and markets are beginning to run out of products. The situation is so dire that Kim Jong-un himself addressed the matter, calling the food situation “tense” at a meeting of the Workers’ Party, and the United Nations and various NGOs have also been sounding the alarm.

Unfortunately, while the regime could take active steps to alleviate the threat posed by the virus and ease the food shortage, Pyongyang has refused delivery of any COVID vaccines and has expelled every NGO worker in the country, along with almost all foreign diplomatic staff. This makes it impossible for international aid to be distributed. But it also gives Kim the time he needs to finish his anti-reform agenda as the pandemic situation can be described to domestic audiences as just as dangerous as ever, especially in light of new variants.

 

Conclusions

Both common citizens and government officials have used the markets to make fortunes despite of the wide range of government regulations and economic sanctions. Through their informal trade relationships with Chinese partners and the creation of quasi-legal private-public enterprises, North Korea’s economy has been able to not just weather these challenges but has managed to grow (by as much as 4% in 2014).

However, North Korea’s closure of the border with China and Russia and the subsequent halt in trade due to COVID-19 has placed great pressure on the markets and their ability to get goods to the people. Inside sources have long been reporting on shortages of daily necessities like toothpaste and international organizations are anticipating massive food shortages should the border blockade continue much longer. But one thing is certain, after being closed off from the world for over a year, the markets and consumers are ready to reengage in the ground-level capitalism that has sustained the population for a generation…if given the chance.

Under a more liberal approach to economics in the first few years of Kim Jong-un’s rule, the markets continued to grow and standards of living improved as well. But as Kim rediscovers central planning and his love for authoritarianism in the wake of COVID, the condition the market system will emerge after the country reopens is in doubt.

However, as upwards of 50% of North Korea’s GDP is generated by private enterprises, if the regime truly wishes to put an end to market activity, it’s going to have a very difficult time putting the genie back in the bottle. I suggest that it is more likely the government will seek to further constrain the markets but will still recognize their indispensable nature in creating a growing North Korean economy.

Many of Kim’s orders recently have had to do with ideological and social correctness, purging impure elements, and stopping the flow of information – particularly among the country’s youth. He seems less concerned with the dollars (or won) being earned so long as they’re not connected to informational feeds that undermine the state and so long as the state receives its share.

Regardless, until international trade can resume, prices will keep rising and shortages will get worse. The North Korean people have shown themselves to be capable of weathering all manner of difficulties, but there always exists a breaking point. Kim is playing a dangerous game by prolonging the pandemic crisis and attacking market activities as even he doesn’t know where that breaking point is.

Over the years, North Korea has slowly reframed its national identity from one of a Marxist state to an ever more ethnonationalist one, centered on the perceived uniqueness of the Korean people. Kim Jong-un has continued this identity shift, stressing that any reforms made are not capitalistic or even based on the reforms taken in other countries, but are expressions of North Korea doing things “in our own way”.

Perhaps, if he can manage to separate the ideology and identity from the realities that are demanded by economic growth, he may be able to guide the country toward being a more prosperous state without losing the highly centralized authority the regime must keep. Then again, reforms never last long in the Hermit Kingdom and his recent actions do not inspire confidence.

Clearly, the misallocation of resources on things like nuclear weapons and missile tests slows economic growth. And the extremely poor state of the country's electrical grid, transportation systems, and healthcare network means North Korea is, in many ways, still trying to fully recover from the downfall of the 1990s, but economic progress could nonetheless be seen in the crowds of people pouring into markets both old and new. Crowds still gather in the midst of the pandemic as people struggle to maintain their livelihoods, but it seems that the regime is in no mood to help. 

 

~ ~ ~ ~

I have scheduled this project to run through to the end of the year, with a new article coming out roughly every 10 days or so. If you would like to support the project and help me with research costs, please consider supporting AccessDPRK on Patreon. Those supporters donating $15 or more each month will be entitled to a final PDF version of all the articles together that will also have additional information included once the series is finished. They will also receive a Google Earth map related to the events in the series, and can get access to the underlying data behind the supplemental reports.
Supporters at other levels will be sent each new article a day before it’s published and will also receive a mention as seen below.

 
I would like to thank my current Patreon supporters: Amanda O., GreatPoppo, Joel Parish, John Pike, Kbechs87, Rinmanah, and Russ Johnson.


No comments:

Post a Comment