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In North Korea’s bid to strengthen new market economy, Kim Jong-un may have to make nuclear concessions

Read through North Korea’s constitution and you will discover a place where the state claims sole ownership over “all the natural resources, railways, airports, transportation, communication organs and major factories, enterprises, ports and banks.”

But the lofty ambitions of a socialist paradise have long since dimmed into a reality that the individual drive for profit offers a more reliable way to extract resources and meet peoples’ basic needs. North Korea has in many ways become a market-driven economy.

It’s a fundamental change that has altered its dynamics of power and, some scholars believe, stands to push supreme leader Kim Jong-un toward nuclear concessions in order to boost his country’s economic prospects and maintain his own domestic authority.

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Trish McAlaster/The Globe and Mail

On Tuesday, Mr. Kim and U.S. President Donald Trump are expected to meet in Singapore for the first summit between sitting leaders of the two countries. The U.S. President arrived in Singapore on Sunday following an acrimonious G7 summit and an ongoing war of words with Prime Minister Justin Trudeau. Mr. Trudeau’s criticism of the President over his protectionist trade agenda was seen by Trump advisers as an attempt to make the U.S. leader look weak ahead of the Singapore summit. Mr. Trump has said he will settle for nothing less than a verifiable plan for complete denuclearization.

Among the most pressing questions hanging over their conclave is whether Mr. Kim’s intentions are any different from his predecessors, who oversaw periods of détente, and even willingness to abandon atomic weapons, that invariably crumbled into acrimony and renewed nuclear terror. The language Mr. Kim has used differs little from that of his father, who already in 2005 agreed to the “verifiable denuclearization of the Korean Peninsula in a peaceful manner.”

Read also: Ban the bomb: How the Treaty on the Non-Proliferation of Nuclear Weapons helped prevent annihilation

Thirteen years later, however, a few things have changed. Mr. Kim can now, with some degree of confidence, claim to have a completed nuclear program and the ability to deliver such weapons to the United States, something his father never possessed.

But the young dictator also presides over a country that has undergone a transformation in the past two decades, largely leaving behind the centrally planned model of old, with its state-appointed jobs and rationed food. The changes began after a devastating famine in the 1990s, but have arguably accelerated since the third-generation leader took power in late 2011, constraining Mr. Kim’s ability to act in economically damaging ways, such as pursuing a nuclear program that results in choking sanctions.

“Denuclearization could have a real chance this time,” said Byung-Yeon Kim, a scholar at Seoul National University and author of Unveiling the North Korean Economy.

He estimates that sanctions have hit North Korea hard enough to shrink its economy last year by 2 per cent, enough to provoke unhappiness among local elites and entrepreneurs. “Outside pressure can be translated into big internal discontent, which could be dangerous to his power,” Prof. Kim said. That economic discontent, if sanctions continue and it is sustained, could be enough to force Mr. Kim to give up nuclear weapons, he believes, lest he jeopardize his own position by angering his people.

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Once the land of the “passive man,” North Koreans “have been born again, to be real individuals nowadays,” he said.

In modern-day North Korea, workers bribe officials so they can forgo the minuscule pay at their state duties in favour of more lucrative employment in mines and factories. Large numbers of people rely on their own ability to earn a private salary rather than the meagre rations doled out by the state. Department stores sell imported fridges and televisions to consumers with their own cash. Well-heeled investors pour cash into companies that are state-owned in name alone. Local academics turn to foreign consultants for guidance in product marketing. In some places, property rights change hands in a de facto real estate market.

“Every part of the economy that is actually working is marketized,” said Justin Hastings, a scholar at the University of Sydney. “And that includes state enterprises. That includes how state officials approach their own jobs. Everyone has to make money to support themselves.”

It’s a radical shift from the country envisioned by North Korea’s founders.

Under Soviet influence, the Democratic People’s Republic of Korea, its formal name, began collectivization of agriculture and nationalization of companies immediately after the armistice that halted fighting in the Korean War. North Korea’s industrial policy in the following years borrowed from China and East Germany to build what Prof. Kim has called a “mass-mobilized, centrally planned economy.” But it depended heavily on support and oil from the Soviet Union, whose collapse exposed North Korea’s economic weaknesses.

After floods in 1995, the country plunged into a three-year famine that local propagandists termed the “Arduous March.” More than 500,000 people died. For many who lived, survival came through selling and bartering in ways that had previously been strictly forbidden.

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It marked a turning point, one scholars called the “forced marketization” of the country under the leadership of Mr. Kim’s father, Kim Jong-il.

In the years that followed, North Korean authorities loosened restrictions on individual market activities and began to open a series of special economic zones to encourage foreign investment.


In this Dec. 20, 2017, photo, workers prepare kimchi on the production line at the Ryugyong Kimchi Factory on the outskirts of Pyongyang. The factory is a showcase of Kim Jong-un’s efforts to boost the country’s domestic economy and produce more, and better, consumer products.

Eric Talmadge

“It was really under Kim Jong-il that institutional changes in the economy began, and markets really came to the fore under his rule,” said Benjamin Katzeff Silberstein, associate scholar at the Foreign Policy Research Institute. By 2010, research based on interviews with refugees found that nearly half had secured their entire income from sources outside the state.

But “it’s clear that Kim Jong-un is more interested in economic development than his father,” said Andray Abrahamian, a researcher who frequently travelled into the country in his former role as executive director of Choson Exchange, a group working to train North Koreans in business. Under Mr. Kim, North Korea has “made a number of really important changes to the rules in their economy that have allowed for more creativity, more entrepreneurship, more freedom of action for individuals.”

The changes have left an obvious mark on the country, said Thomas Fisler, who led the Swiss Agency for Development and Cooperation in Pyongyang for four years before leaving last fall. In that time, there was visible growth in the number of goods on offer at department stores, and in the number of neighbourhood markets − in Pyongyang and smaller centres alike. There was “clearly an increase. And also, families’ cash flow has increased.”

While the public distribution system for rations remains in place, it only provides 330 grams of cereals per person per day, “not sufficient to survive,” Mr. Fisler said.

That means “every family is engaged in economic activities,” he said. In the countryside, people might sell honey or raise goats. In cities, poorer people might sew dresses or repair shoes. Those who work at state factories might take home shoes to resell, or skim money off foreign-currency transactions for trade.

“All of that together makes for a fairly well-functioning market economy. Because the market is there. The demand is there − and the goods as well,” Mr. Fisler said.

The relative abundance of homes with solar panels and, to a lesser extent, televisions and refrigerators, has persuaded him that it’s not uncommon for a family in the capital to earn US$200 to US$800 a month.

North Korean scholarly literature contains clear confirmation of the transformation under way. Seoul-based researcher Peter Ward, a graduate student at Seoul National University, recently travelled to Pyongyang, where he purchased local economic journals. He has also read through a list of local laws. “There’s so much in there,” he said.

“There have been big changes under Kim Jong-un.”

This November, 2017, photo shows cyclists passing along a road on the outskirts of the industrial city of Chongjin on North Korea's northeast coast.

ED JONES

The state continues to assert control over the economy − and there are indications that Mr. Kim has overseen an effort to gather back private market activities under the state umbrella.

At the same time, there are provisions for companies, even if they are formally state-controlled, to accept investment from citizens. “It’s basically admitting the existence of private capital,” Mr. Ward said.

In addition, “enterprises have been told they should produce whatever they like − they should find good products to produce, set prices and trade amongst themselves,” Mr. Ward said.

“Competition is a thing in official North Korean economic policy now.”

Makers of consumer goods such as alcohol, and even individual shops, are creating brands and competing on price. Na Jung Won, a scholar in North Korean Studies at Korea University, wrote in a recent article for DailyNK that local academics have even discussed the use of a tool called the Boston Consulting Group Matrix for strategic product planning.

“Since Kim came to power, he’s had a stated objective of economic reform,” said Phill Hynes, head of political risk and analysis for ‎Intelligent Security Solutions Ltd. He has travelled to Pyongyang numerous times to discuss foreign investment in the country, including in recent months, and pointed both to Mr. Kim’s Premier, Pak Pong-ju, a septuagenarian known as a proponent of economic reforms.

Mr. Kim has also changed his rhetoric. In late April, he said that the conclusion of North Korea’s nuclear program meant “the party’s [new] strategic course is to focus all of its energy on building a socialist economy.” North Korea’s byungjin, or “parallel advance” of pursuing both economic gain and nuclear weapons had been a central political ambition, and the shift signalled important change.

Days later, Mr. Kim agreed with South Korean President Moon Jae-in to work together on improving North Korean road and rail infrastructure. Shortly thereafter, Mr. Kim asked Chinese President Xi Jinping for investment in four North Korean economic zones, according to a recent report in South Korea’s JoongAng Daily.

North Korea has spent more than a decade studying “the different models of reform and opening up that have been executed by various developing countries,” Mr. Hynes said, examining places such as Mongolia, Vietnam, China and Myanmar.

Now, Mr. Kim faces pressure to achieve something. “Having staked a lot of his political legitimacy on economic development, he’s at least expected to do something,” Mr. Katzeff Silberstein said.

But, he said, “it’s still unclear what that something is”− and he doubts Mr. Kim’s power hangs in the balance. “In North Korea, the supreme leader is in full control almost no matter what other things happen.”

Still, the country’s economic changes are important enough to have a bearing on Mr. Kim’s conduct at the coming summit.

North Korea’s ”marketization has gotten to the point where Kim Jong-un needs the sanctions to back off to a certain extent,” said Mr. Hastings, whose book A Most Enterprising Country catalogues North Korea’s economic development. Otherwise, Mr. Kim risks “a situation where the elites are losing all their money-making opportunities and maybe starting to withdraw their support from him.”

The fact that Mr. Kim has been willing to publicly discuss denuclearization “is proof that he wants to transform his nation and connect his country to the outside world,” said Lu Chao, director of the Border Study Institute at the Liaoning Academy of Social Sciences, and one of China’s foremost experts on North Korea.

“But his ambition is just ambition, at least for now. It’s not something he can realize on his own. It depends largely on the future of the relationship between North Korea and other countries.”

Nevertheless, he added, “Kim Jong-un is undoubtedly an ambitious person.”

With reporting by Alexandra Li

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