Kim Jong Un’s Tortuous Path to Economic Reform – War on the Rocks

Though the epidemic prevention situation is harsh at present there should be nothing missed in the planned economic work, Kim Jong Un said last month. The North Korean leaders appeal to keep up economic production while combating a COVID outbreak which Kim described as a great upheaval, an unusually strong formulation to refer to a domestic situation in North Korea shows just how vulnerable the countrys economy is. Pyongyangs surprising acknowledgment of a COVID-19 outbreak in the country raises many questions, one of which is how the epidemic might impact the economy. That it was already ailing before COVID arrived is something Kim himself has alluded to and admitted on multiple occasions.

Notwithstanding the high level of interest in the North Korean economy, it is a murky topic for most followers of the country. For a nation that devotes a great deal of its media space to economic news, it reveals surprisingly little useful information about the actual state of the economy. Even the annual budget breakdowns and production growth rates at parliamentary sessions the only set of official economic statistics provided by the North are all percentages and not actual amounts, which is hardly helpful to economists seeking hard data on the countrys economic conditions. Articles that seem as though they might provide some insight into the Kim regimes thinking on economic policy are often long and obscure, taking the art of deciphering state propaganda to new heights.

While numbers and percentages may provide instant gratification in finding answers to North Koreas current economic conditions, the fundamental matter at hand is economic policy, for it is this that will have longer-term consequences for the future of the country and possibly even the Korean Peninsula. And central to North Koreas economic policy is the Kim regimes current and future calculus on market-oriented measures, which this article shall loosely refer to as reform. How much progress North Korea makes on these initiatives, as well as the extent to which it is willing to forge ahead with them, will shape the countrys domestic and foreign policy agenda. How North Koreas increased focus on defense programs as demonstrated by its missile campaign since the beginning of the year that included intercontinental ballistic missile tests figures into its economic thinking also is food for thought.

In that vein, the questions to ask at this juncture are as follows: What is the status of North Koreas economic reform under Kim Jong Un? What might we expect of the countrys discourse on reform in the light of reinforced central control, the Norths renewed commitment to strengthen its nuclear and missile capabilities, and its apparent lack of interest in diplomatic engagement with the United States and South Korea? Pyongyangs continued quest for reform will to a large extent hinge on how it manages issues related to control, as well as the allocation of national resources. This balancing act will be seriously challenged by the countrys pivot to greater centralization and isolationism.

Kims Reform: A Work in Progress

In December 2011, Kim Jong Un inherited a decrepit economy that was still reeling from the aftermath of a failed currency reform two years earlier. Resuscitating the economy was clearly a top priority on his mind. The new leader sought to do just that by resuming his fathers July 1 economic measures, reforms that were launched in 2002 but in effect had been reversed by the end of Kim Jong Ils rule. Immediately after his fathers funeral, Kim gave senior Workers Party functionaries broad guidelines on economic management methods of our style, a code for market-oriented policies within the parameters of socialism that would be the governing principle of his economic policy.

After undergoing a period of research, planning, and conducting trial runs, North Korea between 2014 and 2015 rolled out reforms in farms, enterprises (the equivalent of companies in a capitalist system), and the financial and banking sector, in that order. The essence of the reforms was incentivizing individual units and workers to become more productive by decentralizing decision-making. Notably, North Korea codified Kims hallmark reform initiative, the socialist enterprise responsibility management system, or SERMS, in the constitution in 2019, indicating the regimes firm resolve to continue with its reformist policies. SERMS grants individual enterprises actual management rights across planning, resources, production, and profits.

Where, then, does North Koreas reform stand now? After a decade, Kims reform-oriented economic measures are still a work in progress. Reform has suffered setbacks, most clearly evidenced in the form of greater central control, but there is no evidence that these initiatives are being reversed.

North Koreas Eighth Party Congress in January 2021 generated much debate among North Korea watchers about the fate of Kims economic reform. The prevailing view seemed to be that reform was in retreat, with some arguing that reform was still in place, albeit with increased emphasis on centralization.

It is understandable why the party congress readout should have led to so many conclusions about North Korea backtracking on reform: State medias summary of Kims report to the party congress contained formulations indicating tighter central control, such as the states unified guidance on or management of resources and products, and the restoration of the states leading role and control in commerce. Moreover, greater central control had been a dominant theme in North Korean propaganda in the months leading up to the Eighth Party Congress.

The question then becomes: Is greater central control necessarily an antithesis of market-based economic reform? Or is Pyongyang trying to achieve both implementation of reform in a more controlled setting, one where it can better manage how reform initiatives are carried out? Evidence points to the latter.

North Korea continues to publicly endorse reform initiatives in enterprises and farms at authoritative levels. Reform in the financial and banking sector continues to be supported less publicly in academic journals by scholars who are likely involved in economic policymaking. Kim Jong Un, in his concluding speech at the Eighth Party Congress, called for push[ing] forward energetically with the research and completion of the economic management methods. This, when placed in the context of Kims earlier remarks that pointed to greater central control, indicated the countrys intent to carry on with reforms in a more controlled environment. In fact, the North is still in the stages of continuously improving and completing economic management methods of our style, according to a recent meeting of the North Korean Cabinet.

Logically and technically speaking, greater centralization results in reduced autonomy, initiative, and creativity in individual work units and among workers all essential ingredients of economic reform. But we need to recall that reform in the North Korean context comes with certain strings attached. In short, central control specifically the states unified guidance of the economy, giving greater freedom to enterprises within the bounds of the socialist economy, and the partys leadership over economic work has been an innate part of Kim Jong Uns reform policy since its inception.

Bumps in the Road

The general assessment is that giving greater autonomy to farms and enterprises and incentivizing workers have by and large resulted in increased production and the growing marketization of the economy under Kim Jong Un. But one can reasonably deduce that economic reforms have not been as easy to shape or implement as Kim Jong Un had hoped. If nothing else can serve as a data point, this can: Nine years after Kim called for the completion of economic management methods, North Korea is still working on them.

There are multiple internal and external reasons for this difficulty. The most obvious one is that there has been no progress on the nuclear issue, without which international sanctions will remain in force and continue to undermine the countrys economy and its prospects for reform and opening. The border closures the North has instituted since early 2020 to keep COVID-19 at bay, including nearly two years of suspended trade by rail with China and the continued prohibition of border crossings by individuals, and the recent outbreak of the virus at home have posed further obstacles.

As is often the case, the bigger, more fundamental challenges have lain tucked within the intricacies of policymaking. Of all these, Pyongyang seems to be faced with two enduring dilemmas associated with economic reform: the balance of control and the allocation of national resources. They have no doubt shaped discussions within the regime about the direction of, and impacted its ability to deliver, reform. And they will determine the future of North Koreas reform, depending on how Pyongyang chooses to tackle these issues.

Control Versus Autonomy

It would not be an exaggeration to say that the question of central control versus autonomy for lower-level economic units lies at the heart of North Koreas reform. The North has wrestled with this issue for the past decade. It will likely remain a sensitive issue as the regime continues to research, improve, and perfect its reform initiatives.

North Korean academic journals often serve as a platform for policy discussions that are not evident in central media like newspapers, where messaging tends to be more consistent and uniform. The journals are thus useful for gaining insight into the different lines of argument taken in the countrys policymaking circles sometimes vocally, sometimes subtly on a range of reform-related topics, some of which are contentious. And all key reform issues discussed in these journals boil down to lines of responsibility between central institutions and individual economic units, how much control the party or the cabinet should exert, and how much latitude typically expressed in terms of initiative and creativity lower-level units and workers should be granted. And more articles actually support giving greater autonomy to individual economic units than we might expect.

The cabinet-party dynamic is another key problem associated with control. North Korea continues to reaffirm the cabinets leading role in the national economy at high-level party and state meetings despite Kim Jong Uns repeated criticism of the cabinets failure to lead the economy properly. This is meaningful in the North Korean context, as the cabinet traditionally has stood for pragmatism (economic reform) and still appears to while the party has represented conservatism (ideology). However, North Korean media have both emphasized the partys economic leadership and repeatedly attempted to clarify a long-standing principle governing the party-state relationship in the management of the countrys economy: the partys role is to provide broader guidance on party policies without encroaching on the execution of party policies by state organs, including the cabinet. This recurring reminder suggests the lines of responsibility between the party and the cabinet are not always clear and there is room for the party to exert more control over the economy than is intended or desired.

As North Korea continues to struggle with the fundamental question of control and lines of responsibility, the countrys shift to a hard line since the collapse of the Hanoi summit in February 2019 is concerning. The countrys stronger pivot to conservatism since it sealed off its borders in early 2020 makes it probable that North Korea will stay on the course of greater centralization revolving around the party for the time being.

Kim Jong Uns main message at a party meeting held in April 2019, while the wound was still fresh from the failed Hanoi summit, was self-reliance, an isolationist term historically used by North Korea when it is not interested in engagement or diplomacy with the outside world, namely the United States. Kims message was quickly followed by North Koreas resumption of missile launches that coincided with a broader media campaign emphasizing ideological purity, the rule of law, and discipline, including in the economic sector in short, tightening the noose and preparing the populace to hunker down for a potentially prolonged period of hardship. The head-on breakthrough battle policy that Kim proclaimed at the December 2019 Party Plenum as he warned of a protracted confrontation with the United States was an extension of the self-reliance narrative.

North Korea has further expanded social controls and reportedly exercised greater dominance over markets since it instituted border closures, partly taking advantage of self-isolation to rein in the public and partly out of need to control market prices and foreign currency reserves. In early 2022, the North Korean premier said the country will keep working to recover the unitary trade system of the state, indicating unified resource and foreign currency management by the state and diminished (or perhaps little to no) trade autonomy for enterprises. Pyongyang appears poised to tighten the partys control even more as it combats the COVID-19 outbreak, with Kim Jong Un repeatedly emphasizing unconditionally obeying party policies at a recent meeting with the countrys top leadership. North Korean state media has renewed calls since early 2021 for building communism, the supposedly ideal end state of socioeconomic development and a concept that was wiped from the party charter and the constitution in the last reigning years of Kim Jong Il. These calls may simply be exhortative and have limited, if any, policy implications. But the campaign reflects a conservative shift in the country and is by no means reassuring from the viewpoint of reform.

Civilian Economy Versus National Defense

Kim Jong Uns ambition to continue nuclear development, coupled with the Norths resumption of intercontinental ballistic missile tests and a probable seventh nuclear test, begs the question of whether North Korea is reverting, or already has returned, to the byungjin line of simultaneously developing the economy and nuclear forces. The byungjin line was in effect from March 2013 to April 2018, when Kim declared the victory of byungjin and announced a transition to the new strategic line of concentrating all efforts on the economy. During the byungjin years, North Korea accelerated its nuclear and missile programs and declared that it attained the goal of completing the state nuclear force. And Kims commitment in recent months to prioritize the economy while defining national defense as an invariable priority policy and goal would seem to signal a return to byungjin, although North Korean medias focus by and large remains on the economy. Unlike in the past, Kim is present at only select missile launches, and missile launch reports, if they are carried by state media at all, have been pushed back to the second or third page of the countrys most authoritative daily, Rodong Sinmun.

If North Korea has in effect returned to byungjin without publicly announcing such a major policy transition from the new strategic line, it would only underscore the sensitivities of reconciling increased defense spending with Kim Jong Uns people-first principle. Irrespective of North Koreas current policy brand, Pyongyang has clearly shifted to a greater prioritization of national defense, and this will almost certainly have negative ramifications for reform. It is not so much that byungjin and economic reform are incompatible. In fact, North Korea introduced and made progress on its reform initiatives during the years of byungjin, while at the same time making strides in its weapons programs. But a greater focus on national defense does mean competing priorities and possibly even a shift in policy priorities. This leads us to a question fundamental to reform: resource allocation.

A study of North Korean journals suggests that the regime has been discussing questions relating to defense spending and the allocation of resources between the civilian economy and the defense industry for years. These questions revolve around the defense industrys place in the national economy, whether the industry contributes to the civilian economy, and whether the country should be spending more money on longer-term investment like national defense or on the more immediate economic needs like spurring growth and providing greater material incentives to workers.

And North Koreas position on these questions will have profound consequences for reform. This is because the more foothold gained by those in the North Korean leadership who support building up national defense, the more resources that will be earmarked for defense spending, leaving that much less resources for revitalizing the civilian economy and for reformist ideas and initiatives to blossom and take root. Unfortunately, North Koreas renewed pledge to advance its nuclear and missile programs suggests that the regime may once again be diverting resources away from the civilian economy to the national defense industry. North Korea typically cites the Iraq and Libya examples to emphasize the importance of strength. Likewise, it is possible that the Russian invasion of Ukraine has empowered proponents of greater defense spending in Pyongyang.

At this juncture, Kim Jong Uns remark at the countrys first national defense exhibition in October 2021 may be worth highlighting: [A]ny development and success of our revolution is inconceivable separated from the preferential development of the national defence capability. North Korea typically uses the logic that strong national defense is essential for stable economic development when it needs to justify greater defense spending.

Looking Ahead

There is a clear pattern of North Korea shifting to diplomatic engagement when it prioritizes economic development and intends to give impetus to economic reform. A peaceful external environment would be favorable to economic development not only because it increases the likelihood of improving diplomatic relations with the United States and attracting foreign capital but also because it is easy to justify directing more resources to the civilian economy.

The connection between Pyongyangs increased diplomatic outreach and economic development was clear in the lead-up to and following the launch of Kim Jong Ils economic reform measures in July 2002. Kim Jong Il sought to improve relations with the United States, met with the South Korean president for the first time, held summit meetings with the Chinese and Russian presidents and the Japanese prime minister, and established relations with European nations. Similarly, North Korea made diplomatic overtures toward China, South Korea, and the United States in early 2018 in the lead-up to a major policy shift from byungjin to concentrating on the economy.

Given this history, we may say North Koreas current lack of appetite for diplomatic engagement since 2019 indicates economic reform is not a top priority. North Koreas continued endorsement of reform at the highest levels indicates it has not reversed or given up on it, but the regime appears to be content experimenting with and improving reform initiatives for the time being. Pyongyangs priority appears to be maintaining the economic status quo and, if possible, improving the economy. It appears to believe it can manage to keep the economy afloat even improve it by using this self-isolation period to work out various domestic political and economic issues and maximizing the countrys capacity for self-reliance, primarily through encouraging local production and recycling and improving science and technology, which are some of the prominent economic themes in North Korean literature.

When North Korea decides it is time to focus on economic development and by a natural extension of that, reform, it will return to diplomacy as it did in 2018. But that likely will happen only after the North attains or at least makes substantial progress with its weapons advancement goals as outlined during the Eighth Party Congress, which it believes will give the country more negotiating power vis--vis Washington. And the current global environment, one where the United States and the West are pitted against China and Russia, provides the perfect opportunity for Kim Jong Un to advance his nuclear and missile capabilities without running too many political or economic risks.

Kim clearly envisioned improving the economy by injecting foreign capital into the country. To that end, the North enacted and amended investment laws and even created special economic zones between 2013 and 2019. For now, all these ideas, laws, and zones look good on paper only. The next time Pyongyang decides to return to negotiations, enough progress will hopefully have been made for the country to follow through on these and other economic initiatives. Until then, North Korea will chug along wearily but tenaciously as it always has, with promised economic development and reform remaining far from reach.

Rachel Minyoung Lee is Regional Issues Manager at Vienna-based Open Nuclear Network and a nonresident fellow at Stimson Centers 38 North Program. Lee was a North Korea open source collection expert and analyst with the U.S. government from 2000 to 2019.

Image: CC-BY 2.0, Flickr user Prachatai

Read more here:

Kim Jong Un's Tortuous Path to Economic Reform - War on the Rocks