2015 marks t he 1 3th year s ince t he i mp lementation of t he ‘ July 1 st Economic Management Improvement Measure (2002~2003)’. Although the ‘July 1st Measure’ was the most radical reform package in the history of North Korea, it has been estimated that the North Korean regime sought to abolish the Measure during the reactionary anti-reform period (2006~2009). However, the North Korean regime revived the reform package beginning in the second half of 2010 following the establishment of the Kim Jong-un regime.
To understand the exact nature of the ‘New Measure for Improving Economic Management’ and predict its future direction, it is necessary to grasp the correlation between the strategic f ields (defense industry and core heavy industry) driven by the government plan and non-strategic fields (light industry and local industry) driven by the market. This research considers ‘Military-First Economic Policy’ as the determinant of this correlation. It reassesses the North Korea’s economic reforms of the 2000s by analyzing its achievements and limitations, and provides forecasts on the direction of economic policy of the Kim Jong-un regime.
The July 1st Measure represents a core policy for the support of the ‘Military-First Economic Policy’ which is Kim Jong-il’s long-term strategy for rebuilding the economy(‘Building the Strong and Prosperous State’). In other words, to concentrate insufficient resources to the strategic field, North Korea could not help increasing autonomy of non-strategic fields not to commit additional resources there; also, the Measure was implemented to move surpluses occurring in the non-strategic field to the strategic field. In this sense, the July 1st Measure can be characterized as two-tracking of the economy involving reinforcement of planning mechanism in strategic fields and marketization in non-strategic fields.
The July 1st Measure and successive radical reform experiments of the Park Bong-joo cabinet (2004~2005) intensified the marketization of the North Korean economy by combining institutionalization of the market mechanism with autochthonic marketization from the ‘grassroots.’ However, this led to a problem where, at one point, the marketization exceeded the scope initially intended by regime. Especially, the capital of the so-called donju(capitalist) was spread throughout the state enterprises, leading to widespread, de-facto privatization. This prompted the North Korean regime to constrain implementation of the July 1st Measure during 2006~2009. Also, Currency Reform was promoted at the peak of this anti-reform period, in late 2009. However, it was actually not an attempt at abolition of the market. Instead, it should be regarded as an attempt for restoring a situation where the market would be more manageable. The basic framework of the July 1st Measure including reduction of the planning mechanism and expansion of market mechanism, especially in company management, remained intact. Coexistence of planning and the market is an inherent demand of the Military-First Economic Policy. In this sense, the move toward preparations for ‘New Measures for Improving Economic Management’ immediately following the failure of Currency Reform was the logical conclusion.
Yet, the outcome of the July 1st Measure was decidedly negative, as it only led to side effects. First, there was almost no improvement of productivity in both strategic and non-strategic fields save for the defense industry; mainly due to the excessive exploitation of the non-strategic field by the strategic field. More specifically, surpluses from the former were siphoned off to the defense industry. In addition, the excessive supplying of currency prompted an inflation tax which meant a penalty for those held on to their cash during high inflation. As a result, a vicious circle of ‘rapid increase of money supply →inflation →rise of exchange rate →inflation’ became entrenched.
In this respect, one can infer that the stabilization of market price and exchange rate after 2/4Q of 2013 is related to the change of North Korea’s currency policy. It appears that North Korea has been reluctant to artificially increase currency supply since the failure of its Currency Reform. Moreover, the dollarization seems to contribute to the stability of exchange rate and price level ironically. However, as dollarization also means the weakening of government authority over the economy, it is more likely to pose a threat for the stability of the regime in the long run.
Kim Jong-un regime has promoted economic reform package (‘New Measures’) from the beginning of 2012. The measures include downscaling businesses operated by the party and the military, and transferring them to the cabinet; thus strengthening the cabinet’s authority for economic control. It also bolstered the autonomy of factories, company and collective farms (plan mechanism is downscaled and market mechanism expanded), and newly established a number of special economic zones/local development zones. In particular, the increased autonomy of factories, comp anies, a nd collective f arms c an b e regarded a s a revival of Park Bong-joo’s radical experiment from 2004 to 2005. Some suggest that the new reform measures are similar to past reform and opening up policies of China in early 1980s’.
At present, the main problem of the reform lay in financing. In order to avoid another inflation, there is no other way but earnest financial reform and North Korean authorities seemed to have understood the fact very well. The regime is trying to centralize the accumulated capital by developing financial instruments and encouraging credit cards. However, these measures have proven inadequate in resolving the people’s distrust of the financial system with those limited attempts.
For successful economic reform, North Korea has no alternative but to implement full-scale financial reform including establishment of a commercial bank. However, financial reform cannot be promoted simply by establishing commercial banks and introducing interest rates. Although the speed of reform could be controlled, it would mean abolition of current dual price system corresponding to market supply-demand. In this regard, the current system of cashless distribution also needs to be abolished. In other words, the regime has to implement fundamental reforms in the financial sector and of the price system to the point of actually decentralizing the planned economy. As the dual track strategy is an inherent condition of the Military-First Economy, the future of new reform policies depend on how far the Kim Jong-un regime can move beyond the strictures of a military-first economy.
At this point, it is worth paying attention to the Policy of Parallel Development of Economic Development and Nuclear Arming (hereafter Byungjin Line) that the Kim Jong-un regime adopted on April of 2013. North Korean authorities assert that this policy is designed to concentrated resources to the civil economic sector freezing defense budget. In this sense, Byungjin Line has possibility of either relaxing or abolishing the Military-First Economic Policy.
The relaxation or abolition of the Military-First Economic Policy, however, has an important precondition: North Korea’s international security environment must be improved. Because of unstable external security situation, North Korea’s nuclear ‘deterrent’ actually has a chance to spark an arms race, which would demand even more investment in national defense. So, the Byungjin Line does not necessarily mean North Korea would promote nuclear armament unilaterally, but likely is an ‘open-ended policy’ with the possibility of freezing nuclear development if the international community accepts their requirements (to accept North Korea as a nuclear power; official diplomatic relations and peace treaty between North Korea and the U.S.)
The problem is that the international community demands that the nuclear issue should be resolved first before international relations as it relates to North Korea can be improved. As for North Korean regime, they insist on improved relations before resolution of the nuclear issue. Therefore, North Korea’s developmental strategy and concomitant reform policy seem to depend on how this chicken-and-egg dilemma can be solved.